International Financial Architecture: Part II

[] This is the second lecture on Understanding the Rise and Fall of the Gold Standard. We start with some Preliminary Observations, then we provide a brief Summary of the first lecture, and then we link the 75m Video, together with a 3100 word Outlne & Summary of the second lecture. These two lectures are detailed. A single 50m lecture for general public, with a 2000 word summary is available from: Understanding International Finance.

PRELIMINARY Observations:

My post “The Education of an Economist” explains that nearly everything I learned about economics during my Ph.D. education at Stanford was wrong. After the Global Financial Crisis, many leading economists came to the same realization; see for example, Paul Romer: The Trouble with Macroeconomics. Today, Ph.D. programs in Macro teach complex mathematics which have no contact with reality; regarding this, Krugman said that the profession as a whole went astray because they mistook the beauty of mathematics for truth .

Why is modern economics so disastrously wrong, so unrelated to reality that the Queen of England went to London School of Economics to ask “Why did no one see this coming?“. This is due to fundamental methodological mistakes which went into the creation of the subject. These mistakes must be corrected to create an Economics for the 21st Century, One these fundamental mistakes is that modern economics is stripped of its historical context, which makes it impossible to understand. To be able to understand economics, one must understand the historical context in which abstract theories were developed. The two lectures on International Financial Architecture describe and explain the rise and fall of the gold standard within its historical context. This is minimum basic knowledge necessary to understand modern monetary and financial system — because modern systems evolved out of the gold standard. However, this knowledge is not currently available in university textbooks. One can get a Ph.D. in Monetary Theory and policy without having any knowledge and understanding of this essential history.

Summary of First Lecture On the Vital Importance of Understanding International Financial Architecture — shortlink: 

The first lecture discusses the Keynesian theory that the exact level of money in an economy is critically important – too little leads to recessions, while too much leads to inflations. Furthermore, domestic business cycles, and international financial crises are caused by pro-cyclical behavior of current artificial systems of money creation and international trade. Standard macro theories make it impossible to understand the economy because they assert that money is neutral, and does not affect the real economy – exactly the opposite of the Keynesian idea that the quantity of money is all important. Standard macro model currently in use throughout the world have no explicit role of money, banks, and credit, even though these factors are of central importance in understanding the world. Once we understand the vital role and function of money within an economy, it becomes possible to understand historical events of the twentieth century – whereas this is impossible using conventional macro theories. The first lecture summarizes how the colonial system came into being, and the monetary arrangement for a hard currency at the core and soft currencies in the periphery. This system of fiat currencies works fine within one system of colonies, where the value of money is decreed by sovereign fiat. For trading between different countries, the gold backed currencies were used. As European countries prospered by exploiting resources throughout the globe within their colonies, inter-European trade increased. The optimal quantity of money required for the domestic economy is not the same as that required for stable international exchange rates. The pro-cyclical money creation which is characteristic of the system creates cycles, and large cycles lead to crises on a routine basis. World War I was partly caused by the breakdown of the colonial trading system due to the end of expansion possibilities after the completion of the conquest of the globe. Efforts to restore the gold standard after World War I failed. The second part of the lecture discusses the post World War I history, with reference to the international financial architecture that emerged in the post-Gold era after World War I.

3100 Word Summary of Second Lecture on Global Financial Architecture

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Subaltern Studies

As discussed in a previous post, History is the Conquest Song of the Victors.  Historians who have developed an understanding of this problem have created the field of “Subaltern Studies” — which studies history from the point of view of those who lost the battles. A very different point of view emerges when we look at history from this point of view. For example, according to the standard story told about how White Settlers captured and occupied the continents of North and South American, the “Indians” — the original inhabitants of the Americas were barbarians and savages who were overwhelmed by the “civilized” White settlers. The reality, which is now gradually emerging, is radically different. Joyce Appleby, Lynn Hunt, and Margaret Jacob have written the book: Telling the Truth About History  which explains how the standard histories which are popular are heavily biased towards the victors, and how we can peel through the masks placed by the victorious historians to arrive at a deeper and more accurate understanding of our past. I have written a brief summary of ONE of the chapters of this books — Re-Learning History: The Conquest of America.  This shows how the brutal realities of Indian genocide by White Settlers is hidden in the standard accounts. A far more moving treatment of the repeated tragedies which led to the destruction of American Indians is available in “Bury my Heart at Wounded Knee“; this has been written by Dee West, an American Indian, with true depth of feeling about the systematic destruction of the habitat and lives of the American Indians by the White Settlers.

Over the past three centuries, the Europeans set out to successfully capture, conquer, and colonize, the rest of the world. By the early 20th Century, they had conquered about 85% of the globe. Because of their dominant position — hegemony — the only stories about this colonization available are the ones written by Europeans themselves, or by those deeply influenced by European education. It has now been widely recognized that these histories are “Eurocentric” — they portray Europeans as the only heroes on the stage of world history. According to these Eurocentric histories, civilization, science, technology, democracy, good governance, honesty, courage, capacity for rational thought, and ALL good things known to man, originated in Europe. Realizing that Europeans were an advanced civilization, while the rest of the world was in ignorance and darkness, the Europeans spread out throughout the world to bring the benefits of civilization to the barbarians and savages living elsewhere. This JUSTIFICATION of the European conquest and colonization is known as the story of the “White Man’s Burden” (the burden of their responsibility to spread their knowledge and civilization.) The truth is extremely different from this cover story. See my essay on the “Ways of the Eagles” for a short description of the reality of conquest India, compared to the Eurocentric myths that we have learned to believe. An excellent recent account is the book by Shashi Tharoor, called: “An Era of Darkness” which describes the brutalities and horrors of the “Raj” or British Rule in India, which have been suppressed and hidden in Eurocentric accounts. The true stories of European brutalities in the process of global conquest are so horrifying that sensitive human beings cannot read them without feeling pain and horror; for a small example, see my earlier post on Colonial Atrocities.

It has been my constant effort to provide some Subaltern stories — histories from the point of view of the loser of the battle — to counter the Eurocentric stories that we have learned from the hegemonic powers which dominate the world. There are SO MANY myths that we have learned and absorbed, that the job of cleansing our minds is long and difficult. We have to work on it one story at a time, piece by piece. Only after gradually cleaning the windows of our minds can the light of truth shine through. Below, I reproduce an article along these lines published in the Express Tribune on Dec 6, 2010. It is interesting that, bowing to the power of the hegemon, ET edited the article and OMITTED the part about the US Invasion of Iraq — we don’t want to displease the masters and lords of the world, do we?

The Subaltern’s Tale

Despite overwhelming superiority in firepower and strategic advantage in their attacks on unsuspecting beasts of the jungle, hunters manage to emerge as heroes in their tales about the trophies hanging on their walls. An African proverb explains that until the lions have their own historians, tales of the hunt will always glorify the hunter.

For the past few centuries, people of European origin have dominated the world. Nearly all the stories being told about the world in this era glorify them, and celebrate their conquests. In Orientalism, one of the most influential books of the twentieth century, Edward Said showed that European imperialism and colonization of the rest of the world permeates all aspects of their literature and thought. A disturbing implication is that the idea of European superiority is implicitly absorbed by anyone who consumes their literary, cinematic or other intellectual or social products – a category to which virtually every reader of this column belongs. Historian Henri Pirenne showed how the attempt picture themselves at the centre stage of history at all times has led Europeans to a substantially distorted understanding of world civilizations, their close interrelationships, dependency and balances, and their contributions to weaving the fabric of global history and society. Efforts of such scholars have led to the understanding that much of our common stock of wisdom about human beings and their history in the past few centuries is “Eurocentric.” Deep and valuable insights about ourselves emerge when we try to get past these blinds.

One of the central themes of the European view of the world is the idea that whole world was in darkness and ignorance, and dawn of the age of reason first occurred in Europe. It is a sign of the weakening of European hegemony that strong evidence against this thesis is now emerging. In The Theft of History, Jack Goody documents how Europeans borrowed and adopted inventions of other civilizations, and claimed them as their own. The Incas were master botanists and created maize by cultivating and cross breeding inedible and poisonous plants. Their inventions continue to feed the planet. Muslim discoveries in mathematics, cartography, heliocentric astronomy, physics, optics, pharmacopia and surgery have been largely suppressed, and European imitators have been put forth as originators of these ideas in current histories.

The one-sided tale of European power naturally creates an inferiority complex among the vanquished. For example, a while ago, an article published in Dawn stated that the British brought concept of public education to the subcontinent.  In fact, research by historian Leitner reveals that British rulers crippled and destroyed the indigenous educational systems of Punjab beyond hope of revival, Evidence of embarrassment and shame about our ancestors, heritage, traditions, and nationality is easily found in a broad spectrum of writings of Pakistani authors. On the basis of an incident where two men were beaten to death in front of spectators, a columnist for the Express Tribune recently proclaimed that we are a nation of cockroaches; comments on this column are almost uniformly admiring and agree [later their was a strong backlash]. In Germany, millions of innocent civilians including large numbers of women and children were burned alive in ovens scientifically designed by engineers for this purpose. As the award winning sociologist Zygmunt Bauman has shown in his book Modernity and the Holocaust, this occurred with the knowledge, cooperation and tacit consent of large numbers of the German population. Yet I do not know of Germans who call themselves cockroaches. More recently, the Iraq war launched on false pretenses has led to deaths of more than a million civilian and destroyed the lives of virtually the entire population of Iraq. Yet those who are prepared to condemn all of Pakistan for two deaths, never tire in their declarations of admiration of the USA as an ideal society.

The project of telling the story from the point of the view of the vanquished has been named “Subaltern Studies,” and has made a lot of progress in India, but not as much in Pakistan. It is encouraging that what we used to call the Mutiny of 1857, our children study as the War of Independence. However, substantial additional effort is needed to overcome a deep seated inferiority complex which makes us seek foreign experts for solutions to domestic problems.


Central Listing for my published Newspaper Articles at: The Subaltern’s Tale ; more, related news/articles on Subaltern Viewpoints – stories from those who lost the war — in order to counter the Eurocentric Perspectives we have absorbed.



The Secrets of Happiness

[] Today, the dominant religion which has spread all over the world is the Worship of the Nafs. Economic theory says that the goal of our live is to maximize the pleasure we obtain over our lifetime from the consumption of goods and services. Every rational individual acts so as to maximize this. See “Economic Theory: Purpose of Life“. This is exactly what is meant by worship of the Nafs. The Quran discourages this very strongly: Q25:43 Have you seen those who have taken their own desires as God?  Q28:50  And who is more astray than one who follows his own lusts, without guidance from Allah? Q79:41 But as for him who feared standing before his Lord, and restrained himself from idle desires. Verily, Paradise will be his abode. Q7:176 he adhered [instead] to the earth and followed his own desire. So his example is like that of the dog: if you chase him, he pants, or if you leave him, he [still] pants.

There are many other verses and Ahadeeth which show that we are not supposed to follow our desires — this EXACTLY the opposite of the teaching of modern economic theory, which assumes that everyone SHOULD follow their desires, and furthermore, that following our desires is the BEST route to obtain welfare and happiness. This is deeply and fundamentally wrong. It is important to COUNTER this message, which reaches the hearts of our Muslim youth from so many media sources — ads, movies, social media showing people busy in the pursuit of pleasure, as the goal of life. The idea that “consumption of goods” and “wealth and luxury” bring pleasure is a poisonous illusion. It leads people to waste their lives pursuing goals which they THINK will bring them happiness, but these goals actually bring them misery. As the Quran states —

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A Realist Approach to Econometrics


Shock-and-Awe created by Western conquest and colonization of the vast majority of Islamic lands has created a crisis of knowledge. Muslims have come to believe that the treasure of knowledge gifted to us by Islam, which revolutionized the internal lives of the Muslims, and changed the paths of history, is no longer of any value. Instead, they believe that modern Western knowledge is valuable, and even worth more. This misconception — the problem of the Modern Mu’tazila — is based on many myths that we have swallowed and come to believe due to our Western education.  This mindset — the superiority of the West — is so deeply entrenched, that it cannot be removed at one stroke. Instead, to cure our inferiority complex, we need to attack the Idol (But) of Western knowledge one piece at a time. The essay below explains how all the extremely complex and sophisticated mathematics which goes into modern econometrics only creates a fraud and and illusion — it creates a way of deceiving people by numbers. One cannot learn any truths about reality from econometrics. This was a keynote lecture (in English) at a workshop on Econometrics held at Fatima Jinnah Women’s University recently. Another version of the lecture was give at PIDE later (URDU Version of this talk) — so both versions are available for viewers. An English language summary of the lecture is given following the YouTube Video of the lecture.

“The Philosophy and Techniques for Quantitative Research” – Keynote Address by Dr. Asad Zaman, VC PIDE at Workshop on 19-20 April, 2018 Dept of Economics, Fatima Jinnah Women’s University, Rawalpindi, Pakistan. PPT Slides for the talk.


My message will come as a surprise to students gathered here to learn advanced econometric techniques. Let me begin by stating it baldly: “Econometrics is nothing more than Fraud by Numbers”.

As Joan Robinson famously said, “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.” A similar statement holds for econometrics. We should learn it not in order to acquire techniques which will teach us how to use data sets to make inferences about reality. Rather, we should learn it to avoid being deceived by econometricians. The techniques described by Perkins in “Confessions of an Economic Hit-Man” are in common use around the world. Fancy econometrics is used to persuade people to adopt policies which harm the public, while fattening corporate coffers.


Link to 66min YouTube Video of same lecture in URDU: Realist Approach to Econometrics

Another lecture on a similar theme – the deeply flawed methodology of modern econometrics, which ensures that nearly every regression we run creates false and misleading results, see: Choosing the Right Regressors.

SUMMARY of Lecture on Realist Approach to Econometrics:

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Transformation of Human Behavior as a Central Strategy for Islamic Economics

[shortlink:] Our Prophet Mohammad S.A.W. created a revolution in human history by transforming ignorant and barbaric Bedouins into models of excellence in human conduct. Any genuine approach to an Islamic Economics must build on the same foundations and use the same approach. The following ABSTRACT of proposed paper submitted for consideration for the 12th ICIEF at Ummul-Qura University, 10-11 Feb 2019, Mecca, Saudi Arabia outlines a methodology for doing so. The full paper is available from the following link: SSRN Version


All social sciences consist of three distinct dimensions. The first is a positive description of human realities. The second is a normative description of an ideal state of affairs. The third is a prescription of what needs to be done to transform the current state to the ideal state. Conventional economics describes humans as being homo economicus, motivated solely by the desire to maximize pleasures obtained by consumption (of goods and services). The ideal state of affairs is for all people to be able to satisfy all desires, but this is not possible due to scarcity. The transformative strategy is economic growth – we increase the amount of production in order to be able to remove scarcity and achieve plenitude. The pursuit of economic growth at all costs, prescribed by conventional economic theory, has caused massive economic injustice, and put the future of mankind in peril, by destroying resources in the mad rush for growth.

Islam differs from conventional economics in all three dimensions. The description of human beings is substantially more complex, and closer to realities of human behavior. Humans have a wide variety of different goals, and they have conflicting desires and motivations. he human heart is a battleground between the forces of good and evil. The human being has been give the capabilities for excellence in both directions, for the greatest good as well as the greatest evil. The ideal state to strive for has been described theoretically in the Quran and Hadeeth, and the perfect model for behavior has been sent to us in the form of our Prophet Mohammad SAW. The strategy for transformation of human beings is Tazkiya, or purification of the heart from idle desires.
Conventional economic theory takes the nature and desires of man as exogenously given, and works on producing goods to satisfy all desires. Islam works on changing the hearts of men to purify them of the greed and competition for worldly goods, and replace these by the higher norms of cooperation and generosity. The Prophet Mohammad SAW created a revolution in history, transforming ignorant and backwards Arabs to become leaders of the world, and to launch a civilization which dominated the world for a thousand years. Today, the central strategy of an Islamic approach must be to work on the hearts of men.

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Colonial Atrocities

The central myth created by centuries of colonial rule is the idea that the West – the colonizer — is advanced and developed, while the East, the colonized, is primitive and backwards. Belief in this myth is created by propagating a large number of lies, which are asserted as being truths, and come to be widely believed. An easy to understand example of this phenomena — how lies become known and accepted as truths — is the recent American invasion of Iraq. This was justified on the grounds that the Americans were doing this to bring democracy to the Iraqi people, to liberate them from an evil dicatator, and to protect the world from the threat of Weapons of Mass Destruction in the hands of a madman. These lies were spread skillfully using a heavily funded propaganda campaign to convince the public of their truth, in order to create public approval for the attack. The reality was that the US wished to gain control of the vast reserves of Iraqi oil. The reality of what happened in Iraq after the US Invasion has no match to the propaganda. The people, who were living in one of the most advanced, developed and modern economies of East, were bombed back to the stone ages. A country wide carpet bombing campaign was carried out, which destroyed schools, hospitals, factories, power plants, and all infrastructure of the country. One million civilians were killed, millions were made homeless and jobless, and the entire population of 40 million was subjected to an un-imaginably terrible calamity, as a functional country was completely destroyed. What Hitler did to the Jews, which is among the most well-known great crimes of the twentieth century, has been topped by what the Americans have done to Iraq in the twenty first century. However, while Hitler’s name is mud, nobody considers Bush and Blair as mass murderers who brazenly lied to their own citizens, and the world at large, to attack and kill, without any justification, one million innocent civilians, and ruin the lives of the remaining 40 million.

Because of the success of propaganda at hiding realities, people like Hassan Nisar keep singing praises of the wonders of the Western civilization, and of their great character and conduct, of their humanity and compassion, and all the great qualities. At the same time, if a handful of Muslims commit barbaric acts of terrorism, this is painted as the greatest problem the World faces, and something for which all Muslims are responsible.  It is the DISPARITY between the reality (of killing millions for control of oil) and the image (of doing service to Iraqi people and to mankind) that is the subject of this essay.

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Build Character to Build Nations

Published in The Express Tribune, June 24th, 2011. For related materials, see  LINK

The torture and burning of Bruno and other scientists, and the forced recantation of Galileo’s heliocentric theory, created a conflict between the Church and science in Europe. This resulted in bitterness which persists to this day. Some years ago, a petition by a Jesuit college for affiliation was rejected by the California Institute of Technology because a faculty member proclaimed “remember Galileo!”. Some scientists go out of their way to discredit religion. For instance, they argue that religion was invented to explain natural phenomenon like rain, lightning, etc. Now that science provides better explanations, religion is no longer needed

Religion was not defeated by science in Europe because it could not compete in explaining natural phenomenon. Rather, this was a consequence of the moral bankruptcy of the upper echelon of the Catholic Church. The crisis caused by the openly flaunted moral corruption of a sequence of popes (which involved living extremely luxuriously, legitimising bastard progeny, selling pardons for sins to raise money for supporting lavish lifestyles, etc.) has been termed “the most momentous event in the history of Europe” in The March of Folly by Barbara Tuchman. She has documented how this directly led to the rise of the Protestants, who attempted to preserve their faith while breaking from the corrupt Catholic Church. The Protestants split into several different Christian sects and factions, which fought among themselves as well as with the Catholics. The intolerance of these sects for each other, and battles, carnage, oppression and injustice, all carried out in the name of Christianity, convinced Europeans that religion could not serve as a basis for ordering a society. Even religious leaders realised that social harmony required principles which could be agreed to by all members of the society, without invoking controversial and conflicting religious principles.

Religion was relegated to a peripheral status in Europe because it manifestly failed its primary mission of spiritual, social and moral development of human beings. Harvard professor Julie Reuben in her book The Making of the Modern University: Intellectual Transformation and the Marginalization of Morality has recorded efforts by universities in the US to put character development on a scientific basis in the early part of the twentieth century. For a variety of reasons detailed in the book, these efforts did not succeed, and were ultimately abandoned. The rise of individualism has weakened families so much that more than a third of all the children in the UK and US are born out of wedlock and raised in broken homes. The powerful media — fiction, movies, internet, etc. — has also abandoned morality. In an earlier generation, villains would always come to a bad end. Today, morally reprehensible characters like paid assassins, prostitutes, thieves and conmen are portrayed as heroes. Lack of moral guidance from families, teachers, and the media has led to a frightening situation. Children brought up in single mother homes are: Five times more likely to commit suicide, nine times more likely to drop out of high school, 10 times more likely to abuse chemical substances, 14 times more likely to commit rape, 20 times more likely to end up in prison and 32 times more likely to run away from home.

All over the world, the characters of leading personalities in politics and elsewhere are often such that even their wives cannot trust them. This is a sad reflection of the vacuum in moral excellence created by the breakdown of the main institutions — family, school and the social milieu — meant to develop character. The spectacular rise of Islam 14 centuries ago can be directly attributed to the excellence in character developed by teachings of Prophet Muhammad (pbuh). These teachings led a group of uneducated and uncivilised nomads to the reins of world leadership and global dominance for a thousand years. It is the loss of character among Muslims today which is responsible for our current pathetic plight. The ancient formulae for development of character appear to have been lost. The world awaits those who rediscover them; as Iqbal has said: Learn once again the lessons of truth, justice and courage, You will be granted the leadership of the world.

Related Materials: The Higher Goals of Education, links to materials on “Education and Character Building