Understanding International Finance

Dr. Asad Zaman, VC PIDE –Monday, 14th May 2018 National Institute of Management, Peshawar — Training for Government Servants on International Finance. This lecture provides a shortened and simplified version of the information in two more detailed lectures on Global Financial Architecture: Rise and Fall of  Gold Standard I, and Gold Standard II. This lecture is addressed to Civil Servants and therefore covers some practical aspects related to policy, and other relevant materials not covered in above lectures. The 50m Video Lecture on YouTube is linked below, followed by an audio file of the question and answer session, and  a 2300 word outline

Question and Answer session after talk was recorded, and audio file is available from:


The slides for the talk can be downloaded from:


An outline of the lecture, based on the slides, is given below:

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The Invisible Hand

This post is a continuation of ET1%: Blindfolds Created by Economic Theory,  The main contention of this post is that Economic Theory is not a body of knowledge — rather it is a body of propaganda designed to protect the interests of the top 1%. To expose this hidden bias, it should be relabeled at ET1% — Economic Theory of the Top 1%. In previous posts, we have analyzed how central concepts of Economic Theory appear to be neutral and equitable, but actually strongly favor the rich and powerful, and act against the interests of the bottom 90%. Similarly, in this post, we show how the Invisible Hand theory appears to be neutral but actually favors the top 1%.

As quoted and refuted in my earlier post on “Failures of the Invisible Hand“, Mankiw writes that: “The reason for excellent functioning of decentralized market economies is that all participants are motivated by self-interest. This self-interest works better than love and kindness in terms of promoting social welfare.”  

What a monstrous statement! How can any human being think such thoughts? This is what comes from cutting off human experience as a source of knowledge, removing hearts from bodies, and leaving only brains floating in vats as a the sole source of knowledge.

Our hearts — in their pure states –would revolt at the oxymoron of a society based on selfishness. However, contamination by the poisons of economic theory and fundamental methodological mistakes leads to the blindness to sources of human welfare displayed in the Mankiw quote. In earlier times, A Christmas Carol of Dickens was sufficient as a reminder the wealth is not a measure of welfare. However, modern times reflect modern mindsets, which convert greed and wealth to desirable virtues, as reflected in the Disney version of Uncle Scrooge. So, sadly, it becomes necessary to argue on logical grounds, appealing to brains in vats, instead of appealing to the heart.

First, let us note that “excellent functioning” just means maximization of wealth, and “social welfare” is also measured by the amount of wealth owned by society. At the individual level, the end-of-life psychiatric disorders of Howard Hughes have been the subject of numerous books and articles. Would anyone consider that the billions he made pursuing profits in a market economy created greater social welfare for him than love and kindness would have? What is true at an individual level is also true at a social level — The Easterlin Paradox shows that massive gains in wealth in societies have not caused corresponding increases in happiness. This is true both in time series for single countries, and for cross sectional studies across countries. As detailed and careful studies show — there is no long run relationship between happiness and increases in GNP per capita. Because this finding threatens the foundations of economic theory, economists have challenged it on many different grounds. In a review of these critiques which re-affirms their original findings, Easterlin et. al. have shown that, they do not differentiate between short and long run. The Easterlin Paradox is more accurately stated as – money does buy happiness in the short run, but not in the long run. This is exactly in accordance with my post on “The Coca-Cola Theory of Happiness” — Coca-Cola does buy happiness in the short run, but is not the formula for long run happiness.

Evolutionary biology has now discredited that idea that the survival of the fittest requires selfishness and competition; see Cooperation and Generosity leads to Evolutionary Success. It is almost obvious that groups would be strengthened by coooperation and generosity. There is no question that we would all prefer to live in a society based on love and kindness, instead of living in jungle ruled by survival of the fittest.  If “social welfare” is understand properly, instead of being reduced to a quantity of money in the bank, it is clear that love and kindness would work much better at promoting social welfare.

Why then have economists in the twentieth century insisted on attributing a mis-interpretation of the invisible hand to Adam Smith (see “Adam Smith & the Invisible Hand“) and have made this the central pillar of modern economic theory? The answer lies in ET1%: the necessity for the top 1%  in democratic societies, to invent theories which appeal to the bottom 90%, while actually favoring the rich and powerful. The Invisible Hand asks us to let everyone do whatever they want, since it will all work out to the best for the entire society. Even if the rich and wealthy appear to be exploiting others, the invisible hand will make sure that their greed is harnessed for the welfare of the society. The only way to make sense of this nonsensical message is to understand it as a clever piece of propaganda which supports the interests of the rich and the powerful, by identifying these interests with those of the society as a whole. This is very similar to the “trickle-down” theory, according to which enriching the wealthy will (eventually) bring benefit to the entire society. Even though it is easy to demonstrate “The Failures of the Invisible Hand” both empirically and theoretically, this theory dominates the pages of the modern economics textbooks. This demonstrates the main theme of my post on ET1%: Blindfolds created by Economic Theory;  modern economic theory is meant to blindfold students to the tremendous advantages the capitalist system confers on the tiny minority of the rich and wealthy, the 1%. It systematically distorts our vision and mindset to cause the tremendous inequities of the system disappear. See my paper on “The Invisible Hand: Death of a Metaphor“, for further explanation for how, with repeated use, a metaphorical usage becomes conflated with reality in the public mind. This is extremely beneficial for the 1% as it allows them to create myths which protect their interests, and have them accepted as truths in the form of modern economics. This illustrates the Power/Knowledge thesis of Foucault.

Does Islam Encompass All Knowledge?

There is an important discussion about whether or not the SECULAR view is compatible with Islam. Those who support the secular view use the following incident, narrated in  Sahih Muslim, Sunan Ibn Maja, Sahih Ibn Hibban, Musnad Ahmed and other sources.

The narration in Sahih Muslim is as follows:

After arriving in Medina, the Prophet (peace and blessings be upon him) passed by some people who were fecundating some date palms, so he asked them what they were doing. When they told him, he said, “I don’t think that will provide any benefit,” or in another narration, “It would be better if you didn’t do that.”

So they refrained from doing it, and that year the crop was not as good. They mentioned it to him (peace and blessings be upon him), and he replied:

“I am only a human: if I command you to do something in your religion, then take it; but if I tell you to do something based on personal opinion, then [realize] that I am only human,” and in another narration, “Yet if I inform you of something from Allah, then do it, for indeed I will never convey an untruth on behalf of Allah Mighty and Majestic,” and in yet another narration, “You know better of your worldly affairs.”


The SECULAR view is that there are domains of human knowledge which are outside the scope of religion. In particular, worldly affairs are outside the scope of knowledge. From this we come to the conclusion that we can study physics, chemistry, biology, and perhaps even economics, without invoking our religion of Islam. Since these are worldly affairs, the knowledge of these must be learned for the people of the world. Unfortunately, because this view is currently dominant, many Muslims have absorbed and accepted this idea. See my posts on “European Transition to Secular Thought”  and “Crisis in Islamic Economics” for more explanation of the secular view, and its effects on Islamic thought.

OPPOSED to this is the view that Islam is a complete religion, which provides us with guidance on ALL aspects of life. Nothing can be outside the scope of religion. This can be supported by the following Ayah:

Quran 16:89 —   that is why We have sent down to you this Book (The Qur’an) to explain everything – a guide, a blessing and good news for Muslims.  Alternative Translation:  We have bestowed from on high upon thee, step by step, this divine writ, to make everything clear,

So the Quran says it explains “all things”.  So how can we reconcile these two facts – on the one hand, our religion provides guidance on all matters, and on the other hand, worldly affairs are (apparently) outside the scope of religion?
TO understand this, first of all note that no-one in his right mind would conclude from (16:89) that the Quran can teach us how to build nuclear reactors.  So the Hadeeth that technical details of planting date trees, in pairs, are not covered by our religion, should not be a cause of surprise to anyone. We cannot even conclude from this that planting of trees is outside scope of religion, because there is so many Ahadeeth about the merits of planting trees and plants and the sin of cutting them down needlessly. 
The question is how to understand the Quran — how does it explain “all things” when it obviously does not provide any information regarding the VAST MAJORITY of current human knowledge? If we just look at the bits and bytes — there must be terabytes of human knowledge, while the Quran and Hadeeth and all commentaries would be easily covered within a few Gigabytes?
We must understand that:  Religion is at APEX – central and highest part — of knowledge.
The GENERAL in charge of the army is technically responsible for ALL affairs of the army. Even though he does not know what is being cooked in the mess and being fed to the soldiers, nor the recipe being used by the chef — he is responsible to ensure that they are fed. He provides the resources, and the relevant orders to the relevant subordinates to see that the job gets done. If there is some failure in the food supply chains, he is responsible to fix these problems and ensure that his soldiers get fed. SIMILARLY, he provides his commander with instruction on general overall strategy for the battle. But the commanders MAKE the micro-decisions on how to implement this strategy, given their troops and the terrain — they may do many things in general conformity with battle plans, but without specific knowledge of the general.
I am arguing that the secular position — that there are significant domains of knowledge OUTSIDE the purview of religion — is WRONG. I do not think any Muslim wishes to argue, on the basis of the tree Hadeeth, that agriculture or biology should be outside the purview of religion — this position is impossible to maintain.  I would like to think that all Muslims would agree with me that the SECULAR position is wrong, and that all domains of knowledge, directly or indirectly belong to the purview of religion. Religion tells us about WHETHER or not we should plant the trees, and what are the rewards or demerits from doing so, and also what our intention should be in planting trees. It does not provide us with the technical details of how deep the seed should be planted, what type of fertilizer we should use, and what irrigation scheme would be suitable.
I have a DETAILED first lecture on Introduction to Statistics: An Islamic Approach — the first lecture deals PRECISELY with this question — what relation does Islam have to an apparently dry and technical subject like statistics? What can the Quran tell us about calculating means and medians? Despite this apparent paradox and contradiction, there IS a deep connection, and our religion CAN provide us with deep insights — NOT available in the West — about how to do statistics. 
See my post linked below, for a brief introduction and links to the lecture, and the entire course. Applying Islamic insights to the development of the course (which is now complete and freely available online for all who wish to use it in teaching) led to radical changes in both the subject matter and pedagogy. I was forced to think about whether or not what I am teaching is USEFUL knowledge which the Prophet sought, or USELESS knowledge, which the Prophet sought protection from. The West does not differentiate between the two, and therefore every course contains a mixture of the two types. Differentiating between them leads to clarity unavailable otherwise:
This post is a continuation of an ongoing debate among Islamic Economists on how to construct an alternative to mainstream orthodox economics. The majority view is that a compromise is needed and we should take existing neoclassical theory and mix it with principles of Islam. My view is that since neoclassical theory is based on the idea of utility maximization, it takes the purpose of life to be maximization of pleasure obtained from consumption — this idea, equivalent to “worship of Nafs” — is not compatible with Islam. Therefore, we must completely reject neoclassical economics, and build on entirely different foundations — see Foundations of Islamic Economics, for a new definition of the subject, based entirely on Islamic principles. The failure of the majority of Islamic Economists to recognize the many contradictions between Islamic ideas and those of Samuelson has led to the current Crisis in Islamic Economics.
For some previous posts on this same, continuing debate, see: Another Syllabus for Islamic Economics. The deeper battleground is the very definition of KNOWLEDGE, which differs radically in the West from Islam. On this important topic, see: The Search for Knowledge, An Islamic Approach to Knowledge, The Conquest of Knowledge, and Countering European Myths about Knowledge.

Crisis in Islamic Economics

[bit.do/azcie] Paper presented at the 8th Int’s Islamic Economics Conference, Doha, Qatar, 25-27 Dec. 2011. Subsequently published in JKAU: Islamic Economics journal: Crisis in Islamic Economics: Diagnosis and Prescriptions,” (CIE:DP), Journal of King Abdulaziz University: Islamic Economics, 25: 1 ,(April/May 2012)

Summary of paper: The fundamental problem facing the Ummah today has been described by Allama Iqbal as follows:


Translation: My eyes were not dazzled by the brilliance of Western knowledge, for they were protected by the Kohl made from the dust of Medina and Najf.

Unlike Iqbal, the eyes of the most of the Ummah HAVE been dazzled by the shine of the Western knowledge, so much say that they have come to regard it as being superior to the treasure of knowledge given to Muslims in the form of the Quran and the Sunnah. This is what creates the problem of the Modern Mu’tazila — the ancient Mu’tazila were overly impressed by Greek knowledge and considered to be on par with WaHy. Today, Muslim children all over the world spend an overwhelmingly large amount of time in acquiring Western knowledge, and relatively little of traditional Islamic knowledge, displaying the priorities of the Muslims in their evaluation of the relative value of the two types of knowledge. Below we present a brief, section-by-section, summary of the paper . The full paper is linked/attached at the bottom of the post.

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The Pursuit of Wealth

Forward: Today, the dominant religion of the world is secular modernism. This is a purely worldly religion, which advocates the unrestrained pursuit of pleasure in this world by all means. Since wealth and freedom are needed for this pursuit, these two are elevated to the gods of modernity. Whereas in the past, religious thought dominated the world, and the battles between different religions were of serious significance, today, all religions have the same position, and can form a united front against secular modernism. One of the central pillars of modernity is the pursuit of wealth, which is universally condemned by all religions. During the European transition to secular thought, “the love of wealth” which is condemned in the Bible (and in the Quran) gradually became a virtue, instead of a vice. See also “Social Revolutions” for a more personal account of how these trends shaped my life and thought via a Western education.

The Pursuit of Wealth: published in The News on Feb 12, 2009

In nearly all cultures and religions, and for most of history, greed, avarice and pursuit of wealth have been considered harmful and evil. Taoist philosopher Chuang Tzu writes: “Do not race after riches, or you will let slip the Heaven within you,” and similar sentiments can be found in nearly all scriptures. Children are reprimanded for selfishness, and taught share toys, cooperate, and be generous in nearly all cultures.

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Social Revolutions

Published on July 7, 2010 in Express Tribune: The version below has been expanded from the original ET article to provide clearer explanations and illustrations of some ideas covered very briefly in the article. See also: Secrets of Happiness
As a teenager, growing up in the US in the post-Hippie 70’s, I was unaware of the broad sweep of the social revolutions taking place around me. The structure of traditional American society, which greatly emphasized family values, was rapidly changing. At the time, this only affected me on a personal level; I did not know that the choices we were making as students & teenagers were being made by everyone. These choices were to prefer individual freedom to social responsibility, and to prefer short-term instant gratification instead making long-run sustained efforts to achieve higher goals. This created the consumerism, hedonism, and individualism that characterizes modern Western societies, which have changed dramatically from more traditional Western societies in the earlier part of the twentieth century. The changes are now in their initial phases in Pakistan, and also throughout the Islamic World, as we struggle to catch up to the West. It is therefore important to look at the outcomes of these processes of social change, so that we can try to avoid their extremely harmful effects.

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Reaching Beyond the Stars

[bit.do/azrbs] Allama Iqbal has described a transforming moment in his youth as the advice given to him by his father. When his father passed by Iqbal reading the Quran, he told him to read it as if it was being revealed to him. Let us follow this advice for a bit, and see where it leads us. Let us start with the Quran 5:32 —  if anyone saved a life, it would be as if he saved the life of all mankind.

If anyone saves my life, it is as if he has save the life of all mankind – My life is very precious! But why? To me, I appear to be an ordinary person much like many others. What makes me so special that Allah T’aala, the Creator of the Universe, who Knows everything hidden and apparent, considers saving my life as being equivalent to saving the life of the seven billion people on the planet?  After pondering this question for a long time, I came to the conclusion that it is not the current reality, but the potential within me that is precious to Allah. Just like Allah T’aala has placed within every seed the incredible potential to become a tree, so He has placed within me, and within every human being, enormous potential of unique value, incomparable to anyone else in history. If I can realize this potential, I can be worth more than seven billion lives which fail to realize this potential.

So how can I realize this potential for excellence buried within my soul? The Quran 53:39 tell us “That man can have nothing but what he strives for”. So the very first step is to make the INTENTION to reach beyond the stars. Today, the ambitions of people are limited to small personal goals, and hence, they can only achieve small things. As Allama Iqbal has said (Bang-e-Dra 116)


It was your own ignorant self who was satisfied with a few flower petals, When the Garden contained plenitude beyond your imagination.

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