The Great Transformation in European Thought

Our Prophet Mohammad SAW made dua both for the acquisition of useful knowledge, and for protection from useless knowledge.  Useful knowledge is that which enters our heart, and advances us in our spiritual journey towards God.  Many types of knowledge can be harmful, and distract us from progress towards achieving the purpose for which we have been given a brief life on this Earth. For example, it is narrated that “Whoever acquires knowledge not learning it except to achieve some worldly gain will not perceive the fragrance of Paradise on the Day of Judgment.” [Ahmad, Saheeh]. Today, Western dominance of the world has led all of us to be deeply influenced by Western conceptions about knowledge, which are precisely the opposite: Knowledge is useful only if it leads to worldly gains. The stark contrasts between Western and Islamic ideas about knowledge and education are highlighted in the first lecture on my course on Introduction to Statistics: An Islamic Approach. The course itself has been constructed to demonstrate that, because of this contrast, it is essential for Muslims to construct alternatives to Western educational models.

Because Western conceptions of knowledge have become deeply embedded in our hearts through the process of a Western education, it is not enough to oppose them by confronting them with Islamic alternatives. Rather, dislodging these ideas from our hearts requires a deeper and more painful process of deconstruction. This involves learning the historical processes which led to the creation of modern secular European ways of thinking which currently dominate the world.  In this complex and multi-threaded story, one essential element is described by Karl Polanyi’s classic “The Great Transformation: Political and Economic Origins of Our Times.” Polanyi describes how the market society emerged in Europe after crushing traditional society, and replacing the traditional social values of cooperation and responsibility by individualistic market values which favor commercialization of all things, including humans and social relationships. My 30 page paper on “The Rise and Fall of the Market Economy” in Review of Islamic Economics, Vol. 14, No. 2, 2010, pp. 123-155 provides a summary of Polanyi, bringing out aspects relevant to Islamic Economics. In this post, I will provide a much shorter summary of 1000 words, which has been among the top 10 posts of a leading heterodox economics blog (RWER Blog) for several years, attracting about 1000 hits every month. The post below is revised and updated version of the original post on RWER blog linked in previous sentence.

The central theme of Polanyi’s book is a historical description of the emergence of the market economy as a competitor to the traditional economy. The market economy won this battle, and ideologies supporting the market economy won the corresponding battle in the marketplace of ideas. Today, the victory of the market economy is so complete that it has become difficult for us to imagine societies where the market does not play a central role. Polanyi argues that contrary to popular belief, markets have been of marginal importance in traditional societies throughout history. The market economy emerged after a prolonged battle against these traditions. As Polanyi clarifies, this is not a good development. The commodification of human beings and land required by the dominance of the market has done tremendous damage to society and environment. The value of human life has been degraded to their earning power. This enables the grim calculations made by Ambassador Albright that sacrificing half a million Iraqi children is worth the control of oil. Similarly, precious rainforests, coral reefs, plants, fish, and animal species which took millions of years in the making, and cannot be replaced at any price, are reduced to the value of timber, food or chemicals. This is the root cause of the social and environmental catastrophes we currently face. The analysis of Polanyi can be summarized in the six points listed below.

1: All societies face the economic task of producing and providing for all members of society. Modern market societies are unique in assigning this responsibility to the marketplace, thereby creating entitlements to production for those with wealth, and depriving the poor of entitlement to food. All traditional societies have used non-market mechanisms based on cooperation and social responsibility to provide for members who cannot take care of their own needs. It is only in a market society that education, health, housing, and social welfare services are only available to those who can pay for it.

2: Market mechanisms for providing goods to members conflict with other social mechanisms and are harmful to society. They emerged to central prominence in Europe after a protracted battle, which was won by markets over society due to certain historical circumstances peculiar to Europe. The rise of markets caused tremendous damage to society, which continues to this day. The replacement of key mechanisms which govern social relations, with those compatible with market mechanisms, was traumatic to human values. Land, labour and money are crucial to the efficient functioning of a market economy. Market societies convert these into commodities causing tremendous damage. This involves (A) changing a nurturing and symbiotic relationship with Mother Earth into a commercial one of exploiting nature, (B) Changing relationships based on trust, intimacy and lifetime commitments into short term impersonal commercial transactions, and (C) Turning human lives into saleable commodities in order to create a labor market.

3:  Unregulated markets are so deadly to human society and environment that creation of markets automatically sets into play movements to protect society and envirnoment from the harm that they cause. Paradoxically, it is this counter-movement, this opposition to markets, that allows markets to survive. If this was not present, markets would destroy the society and the planet. For example, the Great Depression caused the collapse of many free market institutions, and the government stepped in to prop them up and substitute for them. Similarly, only massive government intervention save the world from a major economic crisis following the Global Financial Crisis of 2007. This protective, anti-market, move allowed capitalism to survive. This is called the “Double Movement” by Polanyi, who says that the history of capitalism cannot be understand without looking at both sides — the forces trying to liberate markets from all regulations, and the forces fighting to protect society from the harmful effects of unregulated markets.

4: Certain ideologies, which relate to land, labour and money, and the profit motive are required for efficient functioning of markets. In particular, both poverty, and a certain amount of callousness and indifference to poverty are required for efficient functioning of markets. Capitalist economics require sales, purchase, and exploitation of labor, which cannot be done with creating poverty, and using it to motivate workers. The sanctification of property rights is another essential feature of markets. Thus, the existence of a market economy necessitates the emergence of certain ideologies and mindsets which are harmful to, and in contradiction with, natural human tendencies.

5: Markets have been fragile and crisis-prone and have lurched from disaster to disaster, as amply illustrated by GFC 2007. Polanyi prognosticated in 1944 that the last and biggest of these crises in his time, the Second World War, had finally killed the market system and a new method for organising economic affairs would emerge in its wake. In fact, the Keynesian ideas eliminated the worst excesses of market-based economies and dominated the scene for about 30 years following that war. However, the market system rose from the ashes and came to dominate the globe in an astonishing display of power. This story has been most effectively presented by Naomi Klein in The Shock Doctrine: The Rise of Disaster Capitalism.

6: Market economies require imposition by violence — either natural or created. As noted by the earliest strategists, deception is a crucial element of warfare. One of the essential ingredients in the rise of markets has been a constant battle to misrepresent facts, so that stark failures of markets have been painted as remarkable successes. There are a number of strategies commonly used to portray an economic disaster as progress and development. Without this propaganda, markets could not survive, as the forces of resistance to markets would be too strong. For example, a fundamental message of modern economics textbooks is that capitalism has created tremendous wealth and unprecedented progress. In fact, notwithstanding capitalist propaganda to the contrary, this growth has been extremely costly. We have sold planet Earth and the future of our children, and are celebrating the proceeds without taking into reckoning the costs. Accounting for the costs of destruction of environment, animal species, and human society, shows that that costs of growth have been far higher than the benefits. See “Evaluating the Costs of Growth” (September 21, 2014). Real World Economics Review, issue 67, 9 May 2014, page 41-51.. Available at SSRN: https://ssrn.com/abstract=2499115.

A 28 minute video-talk expanding on the points made above is available from You-Tube:

Supplementary Readings and Videos:

For links to articles, videos, and posts, explaining various aspects of Polanyi, see Resources for Study of Polanyi’s Great Transformation

My full article, which provides further details of this brief sketch,  can be downloaded from the link below:   “The Rise and Fall of the Market Economy,” Review of Islamic Economics, Vol. 14, No. 2, 2010, pp. 123–155

Polanyi’s analysis cannot be understood by modern economists because it is based on methodological principles radically different from those currently in use.  The Methodology of Polanyi’s Great Transformation explains these principles, which demonstrate the necessity of considering historical and cultural context of economic theories. Polanyi’s analysis provides the basis for a radically different approach to economics, which considers politics, society, environment, and economics as inter-related subjects which cannot be understood in isolation.

The relationship between the Great Transformation and the looming environmental catastrophe which threatens the future of humanity on planet Earth is discussed in Zaman, Asad, Markets and Society (September 17, 2015). Pre-publication Draft of “Unregulated Markets and the Transformation of Society” Chapter 18, Routledge Handbook of Ecological Economics: Nature and Society. Editor Clive Spash. 2016. Available at SSRN: https://ssrn.com/abstract=2662167. A 50m video talk on this topic is available from https://www.youtube.com/watch?v=EoESaHpxvM8

 

Advertisements

Reviving the Promise of Islamic Economics

First generation Islamic Economists like Maulana Maudoodi, Ayatullah Sayyid Muhammad Baqir As-Sadr suggested that an Islamic Economic Sytem (IES) would bring economic justice for all, end exploitation, and provide basic needs to all. This system would be far superior to Capitalism, Communism, and Socialism. Many modern Islamic Economists have abandoned these claims, and consider Islamic Economics to be a minor variant of Capitalism. For instance, “IES = Capitalism + Zakat – Interest” is a formula proposed by some to characterise the IES. How was the grand vision lost, and how it can be revived, this is the topic of my paper and talk with the title above. This paper “Reviving the Promise of Islamic Economics” was presented at the 11th ICIEF in KL, Malaysia, 10/2016, and subsequently published as: ZAMAN, Asad. Reviving the Promise of Islamic Economics. International Journal of Economics, Management and Accounting, [S.l.], v. 25, n. 2, p. 205-225, aug. 2017. ISSN 2462-1420. Available at: LINK to Published Journal Version  For a previous talk on similar topic, see: The Crisis In Islamic Economics: Diagnosis & Prescriptions – my talk at 8th ICIEF in Qatar, 12/2011. This article has also been translated into Turkish: : İslam Ekonomisi Umudunun Yeniden Doğuşu

To understand what happened, and how it can be reversed, we must study the history of emergence and evolution of Islamic economics, which is described below (also posted as “What Is Islamic Economics?“:

Islamic Economics: Brief History of Thought

Early in the 20th century, about 90 per cent of Muslim lands were colonised. The two world wars substantially weakened the European powers, and enabled liberation movements to succeed all over the globe. At the time, there were two competing models for organising economies: capitalism and communism. Revolutions are driven by ideologies, and leading Islamic thinkers like Maududi and Baqir Al-Sadr offered a third alternative as the natural option for newly-liberated Muslim countries. They argued that Islam had its own distinct economic system, and this system was superior to both capitalism and communism. For reasons to be discussed, this idea of constructing a radical alternative to dominant economic systems was not realised in the post-colonial period.

Colonial educational systems had explicit goals to create a buffer between the rulers and the colonised, as described by Lord Macaulay in his famous Minute on Education: “We must at present do our best to form a class who may be interpreters between us and the millions whom we govern; a class of persons, Indian in blood and colour, but English in taste, in opinions, in morals, and in intellect.” These intermediaries were called ‘compradores’ in Latin America, Black Skins with White Masks(Frantz Fanon) in Africa, and Brown Skins with White Masks (Hamid Dabashi) in Asia. They ran the vast administrative and bureaucratic structures on behalf of the colonisers, and naturally came into power following independence. These compradores were trained to believe in the superiority of the colonisers, and to treat their heritage, ancestors and indigenous society with contempt. Plans for an Islamic economic system were put on the back burner as Islamic groups engaged in the struggle to wrest control from secularised and Westernised compradores. For complex sets of reasons, these struggles were unsuccessful and the compradore class succeeded in retaining power throughout the colonised lands.

Second generation pragmatists saw that the required revolution did not appear to be forthcoming. They abandoned the grand vision of the founders for a just and equitable alternative to both capitalism and communism. More limited goals were targeted. Instead of rejecting capitalist institutional structures, the new Islamic economics (nIE) attempted to tinker with capitalism in order to make it conform to Islamic principles. A popular formula for defining the subject became: nIE = Capitalism – Interest + Zakat.

Large numbers of second generation Islamic economists acquired professional training in modern economic theory. In the course of their study, they came to believe in the epistemological claims of the discipline. Economic theory claims to be a positive discipline, on a par with the physical sciences. The second generation was unable to see through these claims, and came to regard economic laws as being on a par with physical laws: objective, factual, indisputable and without normative elements. The laws of supply and demand were seen as having the same validity as the law of gravity. This misconception was fatal to the project of developing a genuine Islamic economics. Whenever the second generation saw a conflict between Islamic principles and economic theories, they assumed the validity of economic theory, and sought to rationalise or modify Islamic principles so as to remove the conflict.

This attempt to harmonise Islam with economics has been abandoned only recently, after the global financial crisis revealed that economic theory, the ‘emperor’ of the social sciences, has no clothes. Nobel laureates were led to ponder why the entire field has gone astray, leading economists responsible for crafting policies which led to the crisis confessed to making huge mistakes, while the US Congress set up a committee to investigate the failure of economic theory to provide warnings about the impending crisis. The root cause of this failure is that modern economics claims to be an objective description of reality, while in fact it is a normative and prescriptive theory. Economics assumes that everyone acts selfishly to maximise lifetime consumption, without any concern for others. Furthermore, this is rational behaviour, which leads to optimal outcomes for society. For example, Nobel laureate Milton Friedman vehemently rejected the idea that businesses have social responsibilities and asserted that their only responsibility is to maximise profits, regardless of social costs.

Evidence has accumulated from many different fields of study that the economists’ description of human behaviour is not empirically accurate. Human beings are naturally inclined to be cooperative and generous, even to the extent of giving their lives to save strangers. Describing competition and greed as natural and rational actually creates these behaviours, so the economists learn to be more selfish than their classmates in other disciplines. The global financial crisis was caused by the greedy behaviour of the financial industry, which sold mortgages to unqualified people, making profits from a process that wiped out lifetime savings of their customers. Such behaviour was enabled and created by standard MBA teachings, which place the bottom line above all other considerations.

Instead of a jungle, with survival-of-the-fittest as the ideal form of social organisation, Islamic economics prescribes generosity and cooperation as the behavioral bases for an ideal world. The Holy Quran is full of encouragement to spend generously on others. Just like economic theory prescriptions of selfishness and competition create such behaviours, ideals of generosity and cooperation also create such behaviours. Throughout the thousand-plus years of dominance of the Islamic civilisation, basic needs of the population were recognised to be a social responsibility. Education and health needs were not commodities to be sold in the marketplace to those who could afford them. Rather, society arranged to take care of these needs for all members. Everybody can see the outcome of the competitive jungle of modern economics in the form of stark inequality, misery for billions, combined with luxury for a select few. At the core of Islamic economics is the idea of social responsibility — as a society, we are collectively responsible for the needs of all members, and not just for those who can earn enough money to purchase these needs in the marketplace. Is this not an ideal worth striving for? 

A 23m Video-Recording of my presentation at 11th ICIEF, Kuala Lumpur, 2016

Talk & Conference Paper presented at 11th ICIEF, KL, Malaysia, Oct. 2016

Posts on Diverse Topics:My author page on LinkedIn. Other works: Index . More material on Islamic Economics

Published as “What is Islamic Economics?” in The Express Tribune, January 18th, 2016.

Listing in AZ Articles: Reviving the Promise of Islamic Economics

Choosing the Right Regressors

Talk at PIDE Nurturing Minds Seminar on 29th Nov 2017. Based on “Lessons in Econometric Methodology: Axiom of Correct Specification”, International Econometric Review, Vol 9, Issue 2. (download SSRN Version)

First, I need to explain why an apparently technical talk about econometric methodology should be placed in a blog on “Islamic WorldView”.  The real reason for this is very complex, and difficult to understand, but at the same time it is important for Muslims to understand. I will give a very brief sketch here, and expand on it later. More complete details are available in my post and paper on the “Deification of Science“. The use of sophisticated math impresses and deceives people, who are unable to see that the foundations on which this complex dance is done are completely unsound, and the results completely unreliable. Describing serious defects in foundations of econometrics is a way to undo the illusion of Western expertise in everything. The most serious problem facing the Ummah is that our eyes have been dazzled by the superficial brilliance of Western knowledge, and neglect the vast treasures that we have inherited in the form of the Quran and the Sunnah. Iqbal described his own escape from the traps of Western intellect as:

Iqbal.jpg

Deep and fundamental flaws in the structures of Western knowledge today arise from their worship of the observable, measurable and quantifiable, and neglect of the qualitative, unmeasurable realities of the complex world we live in. In later posts, I will provide greater clarity, depth, and details about flaws in Western epistemology. Here is I just provide an introductory sketch.

Very briefly, the extremely bloody and cruel fights between different religious factions in Europe led to general dis-enchantment, and eventually, rejection of Christianity. This loss of faith was highly traumatic — Deceived by their religious leaders, the Europeans vowed never to trust anything they could not touch or see. This led to a strong bent on EMPIRICAL and EVIDENCE based decision making, which we see going strong to this day. There are many extremely important decisions which are purely qualitative and subjective, and these have been neglected and ignored in the West. This HUGE emphasis on data and numbers, and complete neglect of the hidden, complex and unmeasurable real world processes that generate the data have led to an EXTREMELY unsound methodological basis for econometrics. I have clarified this issue in Methodological Mistakes and Econometric Consequences. These methodological defects are reflected in sloppy practices, which result in huge numbers of misleading and deceptive regression results — nonesense or meaningless regressions. The paper and talk below deals with one very simple issue regarding choice of regressors which is not explained clearly in textbooks and leads to serious mistakes in applied econometrics papers.

SUMMARY OF PAPER: [One (among many) basic widespread misunderstanding about choice of regressors in a regression model]  The importance of relevant missing regressors.

Conventional econometric methodology, as taught in textbooks, creates serious misunderstandings about applied econometrics. Econometricians try out various models, select one according to different criteria, and then interpret the results. The significance of the fact that interpretations are only valid if the model is CORRECT are not highlighted in textbooks. The result is that everyone presents and interprets their models as if the model was correct. This relaxed assumption – that we can assume correct any model that we put down on paper, subject to minor checks like high R-squared and significant t-stats – leads to dramatically defective inferences. In particular, ten different authors may present 10 different specifications for the same variable, and each may provide an interpretation based on the assumption that his model is correctly specified. What is not realized is that there is only one correct specification, which must include all the determinants as regressor, and also exclude all irrelevant variables (though this is not so important). This means that out of millions of regressions based on different possible choices of regressors, only one is correct, while all the rest are wrong. Thus all 10 authors with 10 different specifications cannot be right – at most one of them can be right. In this particular case, we could see at least 90% of the authors are wrong. This generally applies to models published in journals – the vast majority of different specification must be wrong.

Now the question arises as to how much difference this Axiom of Correct Specification makes. If we can get approximately correct results, then perhaps the current relaxed methodology is good enough as a beginning point. Here the talk/paper demonstrates that if one major variable is omitted from the regression model, than anything can happen. Typically, completely meaningless regressors will appear to be significant. For instance, if we regress the consumption of Australia on the GDP of China, we find a very strong regression relationship with R-squared above 90%. Does this means that China’s GDP determines 90% of the variation in Australian consumption. Absolutely not. This is a nonsense regression, also known as a spurious regression. The nonsense regression is cause by the OMISSION of an important variable – namely Australian GDP, which is the primary determinant of Australian Consumption. A major and important assertion of the paper is that the idea that nonsense regressions are caused by INTEGRATED regressors is wrong. This means that the whole theory of integration and co-integration, developed to resolve the problem of nonsense regression, is searching for solutions in the wrong direction. If we focus on solving the problem of selecting the right regressors – ensuring inclusion of all major determinants – then we can resolve the problem of nonsense or meaningless regressions.

Next we discuss how we can ensure the inclusion of all major determinants in the regression equation. Several strategies currently in use are discussed and rejected. One of these is Leamer’s strategy of extreme bounds analysis, and some variants of it. These do not work in terms of finding the right regressors. Bayesian strategies are also discussed. These work very well in the context of forecasting, by using a large collection of models which have high probabilities of being right. This works by diversifying risk – instead of betting on any one model to be correct, we look at a large collection. However, it does not work well for identifying the one true model that we are looking for.
The best strategy currently in existence for finding the right regressors is the General-to-Simple modeling strategy of David Hendry. This is the opposite of standard simple-to-general strategy advocated and used in conventional econometric methodology. There are several complications in applying this strategy, which make it difficult to apply. It is because of these complications that this strategy was considered and rejected by econometrician. For one thing, if we include a large number of regressors, as GeTS required, multicollinearities emerge which make all of our estimates extremely imprecise. Hendry’s methodology has resolved these, and many other difficulties, which arise upon estimation of very large models. This methodology has been implemented in Autometrics package within the PC-GIVE software for econometrics. This is the state-of-the-art in terms of automatic model selection, based purely on statistical properties. However, it is well established that human guidance, where importance of variables is decided by human judgment about real-world causal factors, can substantially improve upon automatic procedures. It is very possible, and happens often in real world data sets, that a regressor which is statistically inferior, but is known to be relevant from either empirical or theoretical considerations, will outperform a statistically superior regressor, which does not make sense from a theoretical perspective. A 70m video-lecture on YouTube is linked below. PPT Slides for the talk, which provide a convenient outline, are available from SlideShare: Choosing the Right Regressors. The paper itself can be downloaded from “Lessons in Econometric Methodology: The Axiom of Correct Specification

For this talk on my personal website, see: http://bit.do/azreg

 

Urdu: The Power of the Quran

7m Convocation Speech at graduation of Huffaz from Hira Islamic School System at Islamabad on Sat 25th Nov 2017. The Message of the Quran changed the course of history. The Quran describes itself as the complete and perfect gift of God for guidance of mankind. It also says that what we Muslims have been given is far better than anything that they (non-Muslims) can gather. It also says that we should not be deceived by the apparent luxury of the non-Muslims. Today, the glitter of Western knowledge has made Muslims neglect the powerful message of the Quran. It was this message that brought the light which ended the dark ages of Europe. The same message had a powerful impact on Thomas Jefferson, and played an important role in shaping the constitution. Today, the message is just as powerful as it was 1400 years ago – it is perfect and complete and sufficient for our guidance today. Unfortunately, most Muslims are neglecting this message, and paying far more attention to Western knowledge, in the mistaken belief that today our guidance depends on modern teachings. In fact, the secrets of success are the same today as they were 1400 years ago, and the key to internal revolution, to transform our hearts, and thereby to transform the world, are contained in the Quran.

A seven minute speech in URDU for graduates of Hira on this topic:

Slides for the talk in URDU; Available from slideshare

Urdu: Power of the Quran — PPT Slides from Slideshare

Short Link for this post: http://bit.do/azpoq

Short Link for this blog: http://bit.do/aziwv

URDU: The Prophet as our guide for revolutionary change

20m talk at Seerah/Meelad Ceremony organized at PIDE (Junior Commons Room) Fri 8th Dec 2017.

The message of Islam, embodied in the person of the Prophet Mohammad SAW, created a revolution, changing the course of history. The CRUCIAL question for us Muslims is: DOES THIS MESSAGE have the same power today? The WEST says no, the message is obsolete and outdated. Progress today requires that we become disciples of the West, and learn all the modern knowledge that they acquired in the past few centuries. Unfortunately most Muslims agree with this analysis. They think that the MESSAGE was complete and perfect for its time, but modern times require us to massively update it.

This is a dangerous illusion. The path to success today is the same as it was 1400 years ago, and this lies in following the Prophet Mohammad SAW. Core and Central Teachings of Islam have to do with how to create an inner transformation, a spiritual revolution, which will enable the growth and perfection of the capabilities for excellence planted as seeds within EVERY human being.  The entire corpus Western knowledge is blind to these possiblities — we cannot learn how to be human by studying calculus, biology, chemistry and physics.  Learning to become a human being is only possible by studying and practising the teachings of Islam.

Some of the key teachings we need to learn, in order to re-create the inner spiritual revolution created in the hearts of the companions, are the following:

  1. Excellence in Conduct. The best Muslim is the one who has the best conduct.
  2. Mercy to all Nations: We have the welfare of the entire humankind in our hearts. This is the responsibility entrusted to the Ummah of Muslims.
  3. All men and women are brothers and sisters, born of Adam and Hawwa. We are all equal, and we are responsible for each other.
  4. Power is given to us to HELP the oppressed, not to oppress.
  5. Wealth is given to us so that we can help the needy, not to flaunt it like Qaroon
  6. The leader of a nation is the servant of the people.
  7. All creation is the family of God. The way to get near to God is to be of service to the Creation

All of these characteristic were displayed by the Prophet Mohammad SAW and modeled for us, so that we can learn them and emulate them. This was how the Muslims reached the zenith of success. Today we have abandoned the Prophetic Model in favor of Hollywood models, which is why we have reached the depths of darkness. The formula for success remains the same as it always was: following the path shown by our Prophet. An 18 minute URDU talk on the Seerah expands on the points made above:

English Slides outlining this talk are available from SLIDESHARE:

Our Prophet Mohammad As A Guide for our Success in Both Worlds

Methodological Mistakes at the Heart of Modern Economics & Econometrics

The Quran 3:196 states that:

لَا يَغُرَّنَّكَ تَقَلُّبُ الَّذِينَ كَفَرُوا فِي الْبِلَادِ

Do not be deceived by the prosperity of the non-Muslims throughout the land. It also tells us that what we (the Muslims) have been given (that is, the Quran), is much better than anything that they (the non-Muslims) can gather. It also tells us that Allah is the friend of those who believe and leads them to the Noor of guidance, while those who reject God are befriended by the devils who lead them astray, from light into darkness.

This post continues the theme initiated in the previous post on the Modern Mu’tazila, by debunking the illusions created by the extremely complex and sophisticated mathematical bases upon which modern economics and econometrics is founded.  This complex and elaborate cover has deceived Muslims into believing that modern econometrics provides us with a sound methodology to obtain information about the real world from data. Similarly, complex mathematical models used in economic theory provide us with insight into the economic processes operating in the real world. Nothing could be further from the truth. There are major and fundamental flaws in the conventional methodology. These have been pointed out be several authors, but the sharp criticisms have been ignored, because no reasonable alternatives are currently available. Several major mistakes in the development of European thought have led to the current methodology for economics and econometrics, based on deep and fundamental flaws. These can be itemized as follows:

  1. The Deification of Science: In a long and complex historical process, Europeans came to believe that their religion (Christianity) was just ignorance and superstition, while the newly emerging sciences were the sole guide and the only source of knowledge. They generalized this belief, without examination, to all religions. This eventually led to the exclusion of morality and ethics from the realm of knowledge. Excluding concepts of justice, fairness, exploitation etc. from economics has led to a highly impoverished subject, incapable of guiding us about the source of deep and increasing income inequalities, and the co-existence of vast amounts of misery, together with vast amounts of wealth, more than enough to eradicate poverty.
  2. The Battle of Methodologies (Methodenstreit): In the late nineteenth century, there was an intellectual battle in economic methodology between the traditional historical and qualitative approach of the German Historical School headed by Gustav Von Schmoller, and newly emerging analytical, quantitative and scientific approach advocated by the Austrian School, headed by Carl Menger. As detailed in Geoffrey Hodgson’s book “How Economics Forgot History“,  this led to the adoption of scientific methodology in economics, without taking care of extremely serious problems created by this approach. Are there universally invariant laws of economics, which operate without regard to historical, geographical and human cultural context, like the scientific law of gravity? Modern economics assumes so, even empirical evidence is strongly against this ideas. In econometrics, we assume that patterns observed in the past will continue in the future, dis-regarding free will of human beings, which allows them to create new and unexpected changes.
  3. Logical Positivism: A philosophy of science which was spectacularly successful in the early twentieth century, and played a central role in creating the foundations of modern economic and econometrics. The main idea of this philosophy was that science is trustworthy and reliable because it is based on observables facts and logic, while religion is superstition because it is based on unobservables entities and speculations. The attempt was made to remove all unobservable terms — like gravity, electrons, electro-magnetic forces, etc. — from science, by replacing them with their equivalents in the form of observables. This attempt eventually failed, leading to the collapse of logical positivism as a philosophy. Nonetheless, despite this failure, the foundations of economics and econometrics were not revised, and economists continue to believe in the principle ideas of logical positivism, even though they have been refuted. As a result, current foundations of economics and econometrics are fundamentally unsound, resting on concepts which have logical contradictions, and have been proven wrong.

The fact that modern economic theory is based on drastically wrong foundational ideas leads to the necessity of creating a new set of foundations for economics, especially if we want to build a new discipline of Islamic Economics. This requires providing an alternative methodology which does not suffer from the defects described above. A major flaw in existing economics is that it completely fails to consider ethical and moral issues, which are actually central to economics. The necessity of taking into account moral considerations has been highlighted by  Hausman and MacPherson: Economic Analysis, Moral Philosophy, and  Public Policy.  However, economists have been unable to take these ideas on board in mainstream economics because of ideological blinders, and also because logical positivism says the ethics and morality are not part of science. Here, Islam offers us an excellent platform on which to build a new economic theory grounded on ideas of economic justice, fair play, and equity. Below, I provide links to lectures on a proposed new methodology for Islamic Economics which would avoid the defects of conventional modern economic theory highlighted above:

Lecture  on Islamic Economics: A New Methodology delivered in 17th IRTI Distance Learning Course on Islamic Economics , 28th May 2013 — Part I is 38 minutes:

Part II of the lecture is 52 minutes.

For Related Readings — short posts — see links below:

Fundamental Flaws of Conventional Economics: WEA  Pedagogy Blog Post. Provides more explanation and details about how twentieth century economics departed radically from previous schools of thought and constructed foundations based on logical positivism. Explains how these foundations have fundamental flaws, which are reflected in the blindness of economics to important issues related to human welfare.

Three Goals for Pedagogical Change: WEA Pedagogy Blog Post.

Deification of Science: WEA Pedagogy Blog Post — this paper provides an introduction to my complex and difficult paper on this topic. It explains why the methodology of social sciences currently in use in the West is fundamentally flawed, and how this problem can be fixed.

The Rise and Fall of Logical Positivism: WEA Pedagogy Blog Post. Provides a short history of the philsophy of logical positivism and the history of its spectacular rise, and equally spectacular fall in the twentieth century. This is a short post of less than 1000 words. For readers who would like more details, please see Logical Positivism and Islamic Economics.