> switch the current economic system which has been the root cause of societal development
Strawman argument, and red herring. Just because we rely on something immoral that brought some value does not mean that there isn't a superior solution.
> switch to a fairy-tail system which you describe but miraculously does not and has not ever existed
Proper Islamic finance exists and has existed and has built empires.
> One where people will lend out money for free!
That's only in a capitalistic society where the only way to raise capital is lending. No they won't lend money for free (except if they want to be charitable). The solution is that money would be invested and risk shared equally among both parties, investor and investee, not lender and borrower, it's very different.
> This is hilarious because its just another form of lending which in fact does yield interes
It's very different. With an interest bearing loan, if the company doesn't work out, the lender will come after the borrower with the full support of the law, taking not only his principal, but the interest on top, destroying the latter. With an investment, if it doesn't work out, then the investor has lost his money and is not owed anything. It's risk sharing.
> and the average auto loan absolutely has a non-zero interest rate
I'm aware, but I wasn't talking about the average auto loan. You see it all the time when auto manufacturers offer 0% loans on certain models because they want to sell.
> Handing out low interest loans indiscriminately is irresponsible and the cause of massive economic damage throughout history.
Poison is still poison, regardless of the amount. The solution is not to give out more poison.
> The government is "taking out the loan" by issuing bonds and paying an interest rate to the bond buyers. So which side is unethical? The lender or the borrower?
Both are unethical. The Islamic perspective is that both the lender and borrower are equal in terms of sin (assuming the borrower is not doing it out of literally a life or death situation, which let's be frank, the vast majority of people are not in such a situation).
> Like which?
Islam prohibits interest, look up the Islamic empires all the way until the Ottoman empire.
> nobody is going to lend money without financial incentive. Why accept the risk?
That's the whole point. Without financial incentive, loans in Islam are purely an act of charity. If you want to invest your money, you invest it in ethical means that involve proper risk sharing. Interest bearing loans aren't that, there are countless other ways to make money. There were and are many rich Muslims that did not make their wealth using interest, but through investments.