Febryan Mujahid Panatagama & Nasyi’ah Uswatun Hasanah
One of the world famous economists is John Maynard Keynes, an economist that was presumed as the father of Modern Macroeconomics. Beginning on 1990’s he expand the worlds’ macroeconomics thoughts. His thinking about the causes of business cycle and his advisory on the rules of government in the economy by its fiscal and monetary policies really influenced the practice of modern macroeconomics. On the first part of this paper we would like to describe about the Keynesian Economics theory at glace. Due to the wide range of Keynesian Economic thoughts we would only be focused on his advises of the government roles on its national economy. Who is Keynes, the history of his economics’ thought, the mains idea of his economics’ thought and our own perspective on Keynesians thought would be also discussed here. Afterward, on the final second part of this paper we supposed to define the particular role of the government on its national economy according to the macroislamic perspectives. On this part we would like to describe on the government roles on the national economy, its role as the core of the nationals’ markets, its role as the huge depositor, and the government role of the enormous buyer and investor.
Keywords: business cycle, fiscal policy, monetary policy, macroislamic perspectives
I. John Maynard Keynes and his important contributions in the world economies’
According to Wikipedia John Maynard Keynes was born on 5th June 1883 in Cambridge, England. Around 1930s, Keynes comes up with new ideas of the economic thinking. It is started with his Keynes’s disappointment of the failure of neoclassical economics suggestions to cover the economics after 1929s great depression.
On October 1929 the New York stock market saw the fall of security values that eventually was to disturb the business confidence. After there, the business confidence is undermined; businesspeople cut back production and their investment. This condition stimulated the business environment to be worse and worse. It decreased the US national income significantly and caused into a large number of unemployment at that time. It became the worse moment of US’s economic disaster when thousands of companies closed up and millions peoples were unemployed afterwards.
On the period of 1929 up to 1932 there were more than 85.000 business failures; over 5.000 banks were suspended their operations; New York Exchanges’ stock values fell from $87 billion to $19 billion; the unemployment rose to 12 million; agricultures and farms income fell over 50%; and manufacturing output decreased by almost 50%.
The Americans’ nation fell from the world most prosperous country to a country with a millions citizens lived in desperate because of poverty. The party that almost suffered this economic disaster was the blacks and other minorities groups; the proportion of the blacks among the unemployed was from 60 up to 400 % more than the proportion of the black in the general population. Some areas on the US terribly suffered its bad impacts more than others. Congressman George Huddleston of Alabama reported in January 1932:
“We have about 108.000 wage and salary workers in my district. Of that number, it is my belief that not exceeding 8.000 have their normal incomes. At least 25.000 men are altogether without work. Some of them have not had a stroke of work for more than 12 months, maybe 60.000 or 75.000 are working one to five days a week, and practically all have had serious cuts in their wages and many of them not average over $1.50 a day.”
How bad that situation, the executive director of the Welfare Council of New York City describes that terrible economic disaster:
“When the breadwinner is out of a job he usually exhausts his saving if he has any. Then, if he has an insurance policy, he probably borrows to the limit of its cash value. He borrows from his relative until they can stand the burden no longer. He gets credit from the corner grocery store and the butcher shop, and the landlord forgoes collecting the rent until interest and taxes have to be paid and something has to be done. All of these resources are finally exhausted over the period of time, and it becomes necessary for these people, who have never before been in want, to ask for assistance. The specter of starvation faces millions of people who have never before known what it was to be out of a job for any considerable period of time and who certainly have never known what it was to be absolutely up against it.”
The most terrible despair of US millions citizen reach it summit on 1932 when a report describing the unloading of garbage in the centre garbage of Chicago city: “Around the truck which was unloading of garbage and other refuse were about 35 men, women and children. As soon as the truck pulled away from the pile all of them started digging with sticks, some with their hands, grabbing bits of food and vegetables.”
The condition before illustrate how bad that great depression impact the Americans. Keynes inquired to know where the classical and neoclassical economists were. Why doesn’t the market mechanism set this disequilibrium of unemployment rates, shortage of food, ceiling prices etc into its equilibrium anymore? Considering how the America’s condition at that time which still has plenty Natural resources, it still has as many as factories including tools and machines and thousands of human resources that waiting for an employments. These things would be discussed on the next subchapter of this paper.
II. Keynesian Economic and Government Interventions
Before further discussion on Keynes contributions and thoughts let us show you the simple scene of western economics thoughts’ history with their simple main ideas particularly on their thoughts about government interventions on the economy:
Explanation on the 1.1 figure, on 1776 Adam Smith (The Economic Father) written his book on title “An Inquiry into the Nature and Causes of the Wealth of Nations”. Smith’s book aimed to say that the economy is talking only about GDP. The book also defines Smith’s idea of “self interest” and “the invisible hand” that regulate the economy to be always on its equilibrium level. It defined that freedom is the basic principle of every nation’s wealth let the people free to express their self-interest or greediness without any government intervention in the economy.
Classical and neoclassical economic exist until 1900s after the great depression the economists tend to looked for an alternative thinking on the economy. Due to that great depression and the world economist’s confusion to look for the better theory, on 1920s Keynes begun to write his “Treatise on Money that was published on 1930 in two volume, the main idea of this book is to examine the relationship among unemployment, money and prices, when the interest rates of bank’s saving is high, the people tend to save their money rather than to investing it; according to Keynes this condition will stimulate the rise on unemployment rates. During the great depression in 1933, Keynes established the means to Prosperity aimed to discuss about the multiplier effect and some advices for the British Government and other countries that suffered for the economic crisis.
On 1936 Keynes established this General Theory of Employment, Interest and Money. The first important thinking of this book is Keynes’s circular Flow of Money’s Theory to make it clearer let us figure this theory into this circular distribution of money from the business un to public scene:
The first important Keynes point of view is his concept of circular flow of money. The figure tries to figure out that in general terminology a Business or Market will distribute its money in term of wages, salary, rents, interests, profits and another terms of money into public, and these money would be flown back into the business when public buy or consume their goods and services from the business. For sure that this theory would not apply smoothly, there after Keynes comes with his three leakages for his circular flow of money:
According to Keynes money would not be circulated such that easy, especially as our consideration that when the interest rate of savings increased; people tend to save their money on banks rather than to invested it to the business. Or in the other hand, people tend to save their income weather they spend it at all at a single period of time.
What General Theory of Employment, Interest and Money’s of Keynes trying to say is Supply (S) sometimes could be neither more nor less than Demand (D) or event equals. It contradicts the former economists’ theory such as the Say’s Law that argued “Supply creates its own Demand”, and that in the free market workers would always willing to lower their wages to the willingness of employers to pay them based on their interest. On it Keynes come with his “Price Stickiness Concept” that figured in the real market workers will refuse to decrease their wages rationally or irrationally. That’s why government might interfere in the economy to lead it into its stable “aggregate demand” and “aggregate supply” or its equilibrium level. This theory is well known as the Keynesian Synthesis.
III. About Keynesian Theory
After a brief discussion on the Keynes ideas of modern economy, we try to demonstrate our perspective on it. Principally, Keynes theory on the government’s intervention on the economy is arisen after the US economy experienced a terrible great depression and his disappointment on the former classical economist’s suggestion that unable to stabilize an economic disequilibrium at that time of period. Out from this course, we see that what Keynes struggled to settle is formally a human effort that might be has any shortcomings and faults.
On his point of view, Keynes still believe that the “Freedom” on the economy still becomes the problem solving on any existing economic difficulties. His belief stimulates and became the nature of liberalism and capitalism on the economy. We are trying to say that a revised thought of Economic idea might only complementary of its former idea, and it might be better or worse because none could forecast the economic condition in the future. The macroislamic thought suggests some government roles that might be applied in the economy as the complementary of Keynes’s ideas.
VI. Government Role in the Economy
The economic role of government can best be defined by a classification of its economic policy aims. Broadly speaking the political choices made by electorates in Western-type democracies influence governments to perform four functions.
- The production of services which private firms are either unwilling to produce or for some reason are not allowed to produce (or at least not exclusively). This public provision may be to provide immediate benefits (e.g. defence, law and order) or deferred benefits (e.g. investment in roads).
- The alteration of the structure of private production in order to conform with some conception of the allocation of resources which is considered ‘better’ than that resulting from private market transactions.
- To intervene in the distribution of income generated by private market transactions in order to conform to some acceptable criterion of equity, for example a minimum income guarantees.
- The stabilization of the economy by attempting to reduce fluctuations in income and employment and to control movements in the general price level. The effects of this action can be seen in both the volume and the mix of transactions between the government and the rest of the economy. Policy models of the economy which place particular emphasis on the control of the money supply and interest rates will pay close attention to the size of the government budget deficit/surplus. Therefore, no particular transaction with the private sector is solely identified with this function except perhaps for the interest paid by government to firms and households as a payment for holding government debt accumulated in the course of financing past government deficits.
V. The Place of Government in the Economy
- First, always check which definition of government is being used, for it can make a considerable difference to the perspective gained about government’s role in the economy.
- Remember that while recorded money transactions enable us to quantify the extent of government intervention for economic policy purposes in a relatively simple fashion, this biases discussion of the relations between government and industry towards forms of intervention involving financial transactions between governments and firms. The Ministry of Finance may have an important role to play in influencing the finance of industry in conjunction with the Central Bank, but that cannot be shown, except in an indirect way, by the size of the financial surplus or deficit (in this case) of the government.
- Do not be taken in by the idea that because some group is responsible for paying taxes or is in receipt of benefits, that this gives a complete picture of the distribution of benefits and burdens. It follows that the imbalances in receipts and payments by sector in budget-derived figures can only be the starting point for much further analysis of their effects.
IV. Government as the Core of an Economy
Ability and behavior of the government in spending and saving money, including from the very large number. Therefore, the government called as a buyer and seller giants and also the mother of all markets. As buyers and sellers of the giant, government must have a strategy for economic stability maintained and there was an increase / growth economy.
Every year the government made a plan budget of the State (State Budget), which contains the policy plan next year. State Budget which was approved by the House of Representatives into the state budget. In this budget reflected fiscal policy will be applied in that year along with achievement strategies.
In conventional economic theory, fiscal policy was made because of the failure of market mechanisms (market failure). If the failures of market mechanisms continue to occur, there will be distortion or disruption of supply and demand which can disrupt the balance of aggregate demand (AS) and aggregate Offer (AD) in an economy.
Competitive market would produce Private Goods efficiently. Producers can benefit from selling Private Goods such as Oran, people will pay to obtain and enjoy it. As for the goods Non-Excludable and Non-Rivalrous, manufacturers can not obtain benefits because people can still use and enjoy the goods without paying. Hence, Public Goods will be more efficient if manufactured not by private companies, but by the government. Government can take advantage by increasing the quality of the community in which the next government to obtain funds from taxes paid by the community itself.
In society there are various kinds of human beings. There are rich and some poor, some were skilled and the unskilled, so there are natural gaps. To that required distribution (equity) for this gap can be minimized. Equity is fairness in distributing resources. The government should help people less fortunate with the help of more fortunate people. Assistance may be provided through taxes, donations, grants, and others.
Any changes to revenue and state revenue impact on government budget. When state revenues greater than revenues, there will be a budget surplus. Conversely, if state revenue is smaller than the state expenditure, there will be a budget deficit.
With no budget deficit means no new money is printed, this means there will be no inflation caused by monetary expansion. For countries that bond markets are not well developed, another alternative is to print money. As disclosed Irving Fisher’s MV = PT, then the application of monetary expantion increase, by printing money, which eventually will cause an increase in inflation rates. High interest rates mean the higher the debt interest to be paid.
To meet the needs of the country in a state budget deficit, the most commonly performed is increase state revenues through taxes or borrowed funds (debt) from public or other parties through the bond. And if it takes a loan from another party, it must be ensured the ability to return the loan.
In the reign of the Prophet. and Khulafah Rasyidin, rarely state budget deficit because the leaders adhered to the principle that expenditure should only be done when there is acceptance. At the time of the Prophet, A budget deficit that occurred only once before Hunayn War. At that time the number of people who converted to Islam more and more so that expenditure is greater than the acceptance of zakat. Messenger pay off the debt before the one year that is after the war. After that, during the leadership of the Prophet. and Khulafah Rasyidin never again occur the budget deficit, even at the time of Utsman bin Affan ra, state budget surplus.
IIV. Government as a Huge Saver
IIV.I Government Budget
There are several ways that governments use to raise funds to run the wheels of government, such as: business, collect taxes and borrow money. In so doing the government set up state-owned business that is expected to generate profits that can be used for the source of State revenue. While the withdrawal tax is imposed on society in various forms such as the UN, VAT and so on. Intake of such tax does not distinguish its form so that it causes instability. The tax reduces the supply of conventional theory. Governments can borrow money from the public or to other sources and must be returned in the future, as well as the loan is only temporary should not be made continuously.
IIV.II slamic Government Budget
Budget revenue sources on the Prophet shaped Kharraj, Zakat, Khums, Jizya and other revenue.
Kharraj is a tax levied against the land based on productivity rather than zoning. So between land owners and the other one pays Kharraj different. What determines the amount of Kharraj is the government, the magnitude Kharraj determined based on the following criteria:
· Level of soil fertility
· Type of plant (market ability and quantity)
· Type Irrigation
At the beginning of the reign of Islam, zakat is collected in the form of cash, the livestock and agricultural products. Below is the system of zakat for each – each form of business.
- Zakat Revenues
Zakat is calculated based on nishab income (minimum income). Nishab alms for the dinar are 20 dinars and dirham to 200 dirhams is issued and the amount of zakat is 2.5% of total revenue has reached or exceeded nisab.
- Zakat Farms
Zakat is calculated based on differentiation in size for each type of animal.
- Zakat Agriculture
Agricultural use a flat rate of zakat is distinguished from the type of irrigation. Agricultural products are perishable goods.
Islam uses Propotional Tax in collecting taxes while his opponent is a Lump-sum Tax. The difference can be seen by using analysis charts that illustrate the long run GDP using actual GDP that describe the business cycle fluctuations. By using Tax Propotional then the amplitude will be small so that when the shocks were then changeable smaller. Instead Lump-sum tax, so if there is a large amplitude shock will bubbling when riding and crashes when it fell.
The amount of amplitude calculated from the following equation
Y = C + I + G
Where C = a + b (1-0.2) y; C = a + 0.8 by
Then: Y = ___1____ (a + I + G)
1 – 0.8 b
Jizya is a tax paid by non-Muslims as a substitute for social-economic facilities and other welfare services. Jizya same poll tax, equal to the minimum amount paid by the Muslims.
- Other Receipts
The meaning is kaffarat or fines. An example for the husband and wife related in the daytime during Ramadan. Or heirs of excess and at times there is zakat Khalifah Umar to get past the bridge.
IIIV. Government as a Huge Buyer and Investor
Government acts as a large buyer is one of the practices of fiscal policy from the expenditure side. One practice from the expenditure side of public policy (government expenditure) in the time of the Prophet. and Khulafah Rasyidin is investment spending for infrastructure development that will support these activities.
Economic growth requires a political environment that could create incentives for investment, the legal system that protects property rights, and protecting the public against corruption, bribery, theft, and taking over the results of their investment.
Infrastructure is a capital that not all types of business firms owned by individuals who make the company become more efficient production. In some poor countries, the value of an investment business and the airport road is reduced due to bad air, the absence of railroads, telephone network, which took many months for installation, the electricity network capacity is not sufficient. As well as political decisions, the physical infrastructure necessary for growth and the numbers can be affected by government decisions.
Increased government spending will also increase the demand aggregate. When we enter the price level effects into the calculation, the increase in government spending continues to have a streak effect (multiplier) on the real GDP, but the impact is smaller than the state in which the price level constant. The more steep the slope of the short-run supply curve, the greater the increase in the price level, the smaller the increase in real GDP and the smaller the effect of successive (multiplier) of government spending.
In the long term, real GDP equal to potential GDP, the economy is at full employment equilibrium. While real GDP equal to potential GDP, the increase in aggregate demand have the same impact, but long-term effects are different.
Due to the successive effect (multiplier) of short-term public policy was not zero (0), expansionary fiscal policy can be used to increase the real GDP and reduce unemployment during a recession, a contraction in fiscal policy can be used also if the economy is hot (overheating) to reduce Real GDP and maintain or monitor inflation.
An event in which the investment was not in line with gross national product growth rate was found at the time the recession in the economic cycle also in the economy that is experiencing inflation. If the value of gross national product remains high and interest rates are also high stage these circumstances may reduce investment.
Unlike the savings and consumption, investment is a business that is unpredictable and risky, because the investment does not necessarily follow the same movement with the gross national product (GNP) different case with consumption expenditure that could affect the value of gross national product (GNP). Investment is an activity separate from the private sector and government sector.
Infrastructure is very important and gets the most attention. Therefore, the government should spend its budget for investment in public infrastructure and create conditions conducive for people willing to invest for productive things.
Starting on the world most influenced economist idea, John Maynard Keynes’s ideas of supply sometime could be over, lower or equals the demand, and there should be government intervention on the economy to lead the aggregate supply and the aggregate demand toward an economic equilibrium level. We try to conclude that government intervention is needed with concern to some macroislamic suggestions such as government as the core of an economy, government role as the huge saver, and government role as the huge buyer and a big investor on its economy.
 See Louis M. Hacker, The Course of American Economic Growth and Development (New York: Wiley, 1970), pp. 300-301.
 See Lester V. Chandler, America’s Greatest Depression (New York: Harper & Row, 1970), pp. 40-41.
 U.S. Congress, Senate, Hearings before a subcommittee of the Committee on Manufactures, 72d Cong., 1st sess., p. 239.
 Quoted in Chander, pp. 41-42.
 Quoted in Huberman, p. 260.