Introduction: Islamic Approach to Micro

In Fall 2017, I taught the standard Ph.D. first semester course on Micro-Economics using an Islamic Approach. The first lecture, summarized below, explains why an Islamic approach makes a huge difference to the study of Micro. The whole set of 30 lectures for the entire course, together with slides, references, notes, and supporting materials (link: Advanced Microeconomics)    is freely available for ANY teacher who would like use and adopt this approach for their own courses in Microeconomics. I would be happy to provide any necessary support to teachers would like to try this novel experiment. I can promise that the students will very much enjoy this approach, because it speaks directly to the heart, and can easily be understood — in contrast to conventional micro, which just involves memorizing math, and learning things about human behavior which are patently false. [shortlink:]

90min English Video-Lecture on YouTube. 2500 Word English Summary is given below:

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On Islamic Economics

Published in Express Tribune, 10 June 2010; See for Urdu translation. Version below has been simplified and expanded. Nonetheless, it was written 8 years ago, just after the Global Financial Crisis, and does not cover many important developments which have taken place in the current decade.

Modern finance is based on trading of debt, and on the use of interest. Both of these operations are prohibited in Islam, making it difficult to “Islamize” finance. Secular mindsets dazzled by glories of the West think that we need to abandon archaic laws, and emulate the West, in order to develop and progress. Apologetic supporters of Islam believe that we need to revise and update Islamic laws, to bring them into harmony with needs of modern times.  Much effort has gone into finding loopholes and stretched interpretations of Islamic law which will permit creation of the equivalents of Western financial instruments within the framework of Islamic Law.  Very often, these efforts seem to stretch the Islamic laws to the breaking point or beyond. For example, Sukuk provide a very complex three part structure which provides a near exact replica of the very simple Western bond — Since the bond is clearly and directly based on interest, it cannot be used in Islamic Finance.

The general public, and many specialists, have expressed a lot of doubts about these efforts to re-create Western financial instruments within the framework of the Islamic law. It seems that the effort is being made to re-shape Islamic laws in order to bring them into conformity with Western ideas about finance, rather than re-shaping finance to bring it into conformity with Islam. The resulting instruments, like Sukuk, seem like they are pointlessly convoluted ways of imitating western ideas about finance. The general public remains skeptical as to whether or not these attempts lead to genuinely Islamic products.

This scenario changed with the occurrence of the Global Financial Crisis (GFC) of 2007. Suddenly, there was a radical realization, surprising to all parties, that instead of being obstacles to progress, the Islamic laws provide barriers against financial disaster. Many western commentators have remarked that adherence to Islamic economic principles would have prevented this crisis. Challenges, a French magazine, went so far as to say that the 7th century text of the Quran offered better guidance than the Pope on financial matters.

It is amazing that Islamic sacred texts, from the days when even the simple financial innovation of paper currency did not exist, offer guidance on how to prevent modern financial crises. How can ancient rules be suitable for modern problems, when nothing remotely resembling modern finance, paper currency, central banks, fractional reserve banking, stock markets, etc. existed in the era in which they were sent down. In the recent past, more than hundred big and small financial crises have occured due to speculation and transactions of types prohibited by Islam. Furthermore, ancient Islamic rules offer guidance on the architecture of a system that would both be proof against such crises and provide a more fair and equitable income distribution. The innovations which are the need of the hour are not in adapting Islamic law to modern institutions, but in changing these modern institutions to bring them into conformity with the ancient laws. In broad outline, six principles of Islamic law which would suffice to prevent financial crises like the GFC 2007, are listed below.

  1. Islamic law prohibits the trading of debt. It was the trading of collateralized debt obligations (CDOs) which triggered the global financial crisis of 2008.
  2. Islamic law insists on clarity regarding the product and the price as a condition for a valid sale. According to the famous financial wizard George Soros, complex instruments like CDOs are “so esoteric that the risk involved may not be properly understood even by the most sophisticated investors.”
  3. Islamic law prohibits interest. There is obvious injustice in a system which requires interest payments of billions of dollars annually to wealthy countries from the heavily indebted poor countries, which cannot afford to feed their own malnourished. The economic consequences of this injustice are apparent in the numerous financial crises resulting from debt defaults in both rich and poor countries. The book “House of Debt” by Mian and Sufi provides an entirely secular argument showing both how debt is extremely unjust and exploits the poor, and creates a crisis prone system. Islamic equity based contracts would avoid many of the problems created by debt, including the global financial crisis.
  4. Islamic law prohibits gambling. An incredibly large proportion of financial transactions are pure gambles. For example, while real international trade is only about $100 billion daily, foreign exchange transactions amount to $ 4 trillion. Thus the vast majority of such transactions are purely speculative gambles about the freely floating exchange rates.
  5. Islam requires every financial asset to be backed by a real asset. The value of paper issued on real world assets cannot exceed by much the real world value of the real assets. Western finance is based on violating this Islamic principle. Today firms do not get rich by doing honest productive work, contributing real value to society. Instead, when the firm incorporates and lists its shares on the stock exchange, financiers inflate the value of the stock to around twenty times the value of the firm.  If the ground real value of the firm is a Thousand Dollars, stockholders have paper which gives them shares of ownership in the firm — these shares are worth Twenty Thousand Dollars. An illusion of wealth is created which does not exist in reality.  The global value of financial derivatives was more than ten times the total GDP of the entire world in 2008, when the crisis occurred.  The financial system is based on deceptions created by using speculation, gambling, and other  financial gimmicks to create value on paper which has no existence in reality. This illusion often collapses, causing distress and misery to millions.
  6. Islam does not allow the OWNERSHIP of wealth to be considered as a productive activity, entitled to earning of returns. This is precisely what the prohibition of interest accomplishes. Today, in Western countries, more than half of the total production of a nation goes to people who contribute nothing to this, but are owners of the wealth needed to lubricate the wheels of production. Mere possession of wealth entitles one to earn more returns than anyone can earn by labor and production, not just due to interest, but also due to many other sophisticated techniques developed by the wealthy to capture a big share of the production pie.

Western financial methods have created a topsy-turvy world where financiers juggling papers make tremendously more than the honest laborers who work hard to produce industrial or agricultural products. This is the source of major problems facing the world today, where financiers who contribute nothing to real world production, can create wealth for themselves and the top 1% purely on the strength of the wealth they already own. This leads to the extreme and increasing concentrations of wealth we are witnessing today.

At the World Economic Forum in Davos, many remarked on the need for radical reforms to solve deepening global economic problems. Currently, producers of goods and services get only about 10% of the total output while 90% goes to bankers and financiers. Applying Islamic laws would channel a far bigger share in the output to the producers and laborers. It should be obvious that more incentives for producers would lead both to greater production and greater wealth for those most in need as well as most deserving of it. Islamic laws in the economic realm are explicitly designed to produce circulation of wealth, alleviation of poverty, and equitable income distributions. These ancient laws are the radical reforms needed to remove the massive injustices created by the current economic system designed to transfer wealth from the poor to the rich, both on an individual as well as the national level.

POSTSCRIPT: For original article, and link to references cited, see: On Islamic Economics

Guidance for Research for M.Phil/Ph.D Economics

A lecture on general guidance about research work was given by Dr. Asad Zaman on Jan, 2017 to MPhil Students at PIDE.  In this lecture, he emphasized the students to get to know their true potential and how to use their energies in right direction. Main points that were discussed in lecture are given below. For a more recent lecture of advice to Ph.D. scholars who have cleared comprehensives and are starting work for their Ph.D. thesis, see: Guidelines for Ph.D. Students starting work on their thesis. The video lecture in URDU/English is linked below — an ENGLISH SUMMARY of the lecture, with links to related materials, is below the video [shortlink:]

A 1200 Word ENGLISH summary of the lecture is given below

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Understanding Macro III: The Rule of Corporations

Preliminary Remarks: Our main goal in this blog is to understand the extremely deceptive nature of Western education. Someone can get a Ph.D. in Macroeconomics by learning about purely mathematical models, having nothing to do with reality. The simple facts of history and politics discussed below would come as a surprise to students who study Macro-economics in conventional Economics courses throughout the world. YET, we cannot understand what macro-economics is without knowing these basic facts about how macroeconomic theories shaped the world that we see around us, in ways that were very favorable to the rich and powerful. Understanding this history is ESSENTIAL to understanding both the real world, and the nature of economic theory, but this is NOT TAUGHT in any conventional course on Macroeconomics.

Understanding Macro III: The Rise of Corporations

In previous parts of this article (Understanding Macro I & Understanding Macro II), we have described how strict financial regulation and Keynesian prescriptions for full employment brought prosperity for the masses, but reduced corporate profits. This last part describes the successful counter-attack by corporations which reversed this state of affairs, causing a massive rise in the income shares of the wealthy 1% and a decline in the fortunes of the bottom 90%.

In the mid 70’s, when I was studying for my Ph.D. in Economics from Stanford, Keynesian economics ruled the roost; pre-Keynesian free market economics was confined to the Chicago School, and not considered intellectually respectable. This situation was reversed in the 90’s, when the Chicago School became dominant, while Keynesian economics was no longer considered respectable. The multi-dimensional strategy used to create this revolution on the academic front is described by Alkire and Ritchie in “Winning Ideas”, while the global strategy to transform socialistic economies into capitalistic free markets is described by Naomi Klein in The Shock Doctrine: The Rise of Disaster Capitalism. A common thread between the two is the patient preparation of detailed plans, while waiting for a crisis, which provides an opportunity to implement these plans.

The intellectual crisis that Chicago had been waiting for occurred in the early 70’s when the Arab Oil embargo, in retaliation for US support of Israel, led to stagflation in the USA. The simultaneous occurrence of high inflation and high unemployment was said to be in conflict with Keynesian theories, while the Chicago School theory of Milton Friedman was said to provide an explanation for the unexpected phenomena. This became widely accepted, and led to a substantial rise in the prestige of the Chicago School, and a blow to the Keynesians. The 1% capitalized on this by providing funds to Sveriges Riksbank, the Central Bank of Sweden, to create a simulated Nobel Prize for Economics, named the Sveriges Riksbank prize in honor of Alfred Nobel. The Nobel family protests against this appropriation of the prestige of the Nobel Prize were ignored, and the public was fooled into accepting this just like the genuine Nobels. In quick succession, roughly half of all the Nobel prizes were awarded to Chicago economists, interspersed with 50% going to randomly chosen others to create a semblance of neutrality. This led to a rapid rise in the academic prestige of the Chicago school.

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US School Shootings: Is It Really Only Their Problem?

Article by Taseer Salahuddin, published in The Express Tribune, May 26th, 2018. See US School Shootings:

School shootings in America are not a new trend. Very first event of this sort happened as early as 1764 in Greencastle, Pennsylvania, when a group of Delaware Indian Americans entered a school, killing a head master and nine pupils. Since then there are approximately four hundred and eighty six different reported events where more than 1260 people lost their lives, majority being children. If researched closely for the change of motives and nature of these killings over time, some very worrisome elements surface. Although no reason is justified for this sort of killing yet a shift from personal reasons to undefined, unexplained massive killing is appalling.

Those who are familiar with the American economy know that a major chuck of their production industry is related directly or indirectly to weapons and warfare technology. American president Eisenhower warned American public against the side effects of this ‘Military-Industrial Complex’ back in 1950’s. Even Eisenhower himself could not connect this over production of guns and their free availability to such gruesome malice. This being said one needs to understand that it is not the gun but the person behind the gun that kills. Therefore, motives of these killings especially by the so called educated youth are a very serious issue to be understood.

Before we look into the reasons of these mass shootings, we need to first ask ourselves how this is related to us. Should we be warned beforehand and take remedial measures? Are these far-happenings a source of ‘dragon awakening’ in our youth?

Pakistani education system is bifurcated into public and private institutions. My research and teaching lead me to prominent public as well as private sector institutions, both at school and university level. Gun-violence on the basis of political and apparently religious conflicts at public institutions is well known fact in Pakistan. Equally well known but mostly hidden under the carpet are the drug, guns and other issues at prominent private universities and even schools. Due to business interests and reputation, most of these incidences are hushed by the administration of the institutions themselves. Being a member of disciplinary committees of different universities for over twelve years I have felt a growing intensity and diversity of violence issues in our youth. Instead of hiding or denying the growing violence with or without guns at our educational institutions, it is high time that we search underlying reasons carefully and fight this problem face on.

Although many are writing in America about the reasons of these violent events and have highlighted multiple reasons from easily available guns, poor gun purchase system, poor moral training, broken families, misogyny, distance from religion etc. they have failed to point out the destruction of human values due to narrow, materialistic, commercial worldview. Americans are not ready to label these incidences as terrorist activities and treat each individual incidence as a separate issue, while actually all these incidences have a collective reason.

Due to scientific and technological progress of the west, world became overawed by their worldview. Like west, the whole world adopted a secular education system which focuses on logical and positivist approach to knowledge. This approach accepted only quantifiable and scientifically tested things as the scope of study and rejected emotions and human values as not study able items. Consequently, academic curriculum and trainings of humans became devoid of human values and emotions. Material status became the new standard of success. More respected in our society are the ones with bigger cars, better mobiles, huge bank balances and look-down-upon attitude. These implicit values attached to the western world-view slowly crept into our educational system as well. Another blow to this deterioration came from blind following of west and total disregard of research from our religious perspective, which was very much needed for developing a true Islamic world-view. This was the lens needed by our youth to understand our world in its current state and to set their everyday standards in accordance with the teachings of Islam.

What is happening in America today is also creeping into our country because of our youth being educated, trained and exposed to their ideal way of life. There is nothing wrong in adopting their scientific developments and technology, but we should be aware of implied impacts attached with their thought process. As Allama Iqbal rightly said,

O people of the West, Allah’s township is not a shop,

Money that you are thinking to be real is actually worthless.

Your civilization will commit suicide with its own dagger,

The nest that is created on delicate branch is not going to be durable.

We need to question ourselves as to why we are blindly following a civilization which is both literally and figuratively committing suicide. It is high time that educated Muslims started a mission of revitalizing Islamic values and world-view.

See also: Remembering Sabika Sheikh

Is Islamic Knowledge relevant for Modern Business?

Introduction to talk by Dr. Asad Zaman, VC PIDE, on Islamic Models of Entrepreneurship — link to AUDIO of complete talk)

Recently, I was invited to Istanbul to deliver a keynote speech on Methodology for Islamic Economics, at the 5th Workshop on Islamic Economics, arranged by IKAM. While I was in Istanbul, I was also invited to talk at the Ibn-e-Haldun University, and at the Istanbul Sehir university.  My three hours long talk at Ibn-e-Haldun University was not recorded, but a very brief summary of a key point regarding how an Islamic education must be radically different from a Western education is available from my previous post on Statistics: An Islamic Approach? . This post is regarding my talk at Istanbul Shehir University, which was arranged by Ahmet Faruk Aysan, Dean of the Management School. Because it was arranged at short notice, I though that the talk would be to the faculty of the management school, and I prepared a talk based on the Islamic Models for Entrepreneurship developed by Dr. Shahid Qureshi of IBA — these models are based on Islamic principles which are often directly the opposite of principles taught in conventional MBA programs. Dr Shahid Qureshi has developed a successful program at IBA, based on Islamic ideas, for teaching entrepreneurship to anyone — even without formal educational background — to teach them how to launch a business from scratch. I borrowed the slides for his presentation of this model, and prepared a talk for the faculty to explain the features of this new approach to entrepreneurship, and how they should develop and use it for designing their courses, and incorporating new ideas into existing courses.  HOWEVER, Dr Ahmet Faruk Aysan had publicized the talk widely, and a large number of students were attending the talk, which was right after Juma prayers at the university. So I decided to give a general introduction to concepts of Islamic knowledge and the potential of Islamic knowledge to revolutionize the world — I felt that this topic would be more useful to the students, to explain the importance of Islamic teachings in the first part of the talk. In the second part of the talk, I explained how Islamic teachings can also revolutionize the business models that we use, by using the slides and ideas that Dr. Shahid Qureshi has developed for the Entrepreneurship Plus model that he teaches at IBA. For the audio recording of the entire talk, and supplementary materials, see the link to (Audio Recording of talk on Islamic Models of Entrepreneurship). Below I present the INTRODUCTION to the talk, transcribed from the audio by Syeda Mehwish Zahid. Later parts of the talk will also be posted on this blog later, insha Allah.

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Understanding Macro II: Post War Prosperity

In this Islamic WorldView Blog, our main goal is to show that the nature of Western knowledge is DECEPTIVE, and to replace this defective source of knowledge by the true source of ALL genuine knowledge, which is the Holy Quran. Western Macroeconomics is deceptive because it pretends to be a precise, quantitative, mathematical and scientific system of knowledge which informs us about the capitalist economic systems in which we live. The reality is extremely different. This article delves into the historical origins of Macroeconomic theory, and how it emerged with Keynes and how it has evolved and change over time.  This analysis leads to much deeper understanding of the Macroeconomics currently being taught in universities throughout the world.

In part 1 of this article (Understanding Macro: The Great Depression (1/3), we saw that Keynes challenged classical economics on many fronts. Against the classical idea that free markets will automatically eliminate unemployment, he argued that governments needed to adopt appropriate fiscal and monetary policy in order to create full employment, as a necessary condition for high economic growth. He also argued that money is not neutral, and that there is fundamental uncertainty about the future.  Widespread acceptance of Keynesian economics was one of the two major ingredients that led to prosperity in Europe and USA after World War II. We start with a discussion of the second ingredient, which was strict regulation of financial institutions.

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