Origins of Banking (urdu)

[] The story of creation of Bank of England in 1694 has been given briefly in “The Origins of Central Banking“. Detailed explanation of the financial gimmicks used by Banks, which continue to be in use today, is given in a separate post on “Monetization, Maturity Transformation, and MMT“. This material is of great importance for Ulema, to understand the nature of money and banking today. These two posts (English) were discussed and explained in Urdu, in a talk for Ulema at Madrassa Darul Taqwa at Chauburji in Lahore, this morning at 9:00am on 27th January 2020. A 50m audio recording of the talk in Urdu, folliwed by Q&A session is linked below. This covers more or less that materials given in the two posts linked above in English.

I gave another talk on the same topic at Masjid Al-Muzammil, G11/3,  Islamabad — The main focus of the talk was “What do Banks Do?” I explained that the widespread belief that banks are financial intermediaries – they take money of depositors and lend it to borrowers – this is WRONG. When banks make loans, they create money out of nothing. The second topic was the concept of Maturity Transformation. How Banks take a one-year loan and finance it by borrowing required amounts on a DAILY basis, thereby converting a one year loan into 365 overnight loans of varying amounts for each day of the year. The talk in Urdu is similar to the one above, but explains the same ideas somewhat differently and has a slightly different focus:

The above is the second talk in a weekly series. The first talk was on Diagnosis and Solutions for Problems Facing the Ummah  at Jamia Masjid al-Muzammil in G11/3 Islamabad on the topic of the title on Tuesday evening 1/21/20. 

POSTSCRIPT: Additional material in URDU – videos, and writeups, on MONETARY topics, is available from the following webpage:


Essence of Modern Money

To establish the basis for genuine Islamic alternates of current monetary system, it is essential to understand the nature of modern money. In this sequence of posts, various such elements on the nature of modern money are explored that are so far overlooked by Islamic scholars. For this, we must understand the way secular economic experts have defined money and on what grounds Ulema has accepted it as a permissible system.

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Modern economists define money in a number of varying views that are astoundingly conflicting. Therefore, no significant consensus is found about either role of money. Classical and real business cycle economists rule out any significant role of money in the real economy. On the other hand, Keynesians believe that money is a potential tool to successfully combat recessions. But monetarists argue that monetary policy has large and inconsistent time lags so, discretion is not viable to deal the economic adversity. Heterodox economists define role of money like a debt-obligation of state, as it is not backed by a valuable commodity like gold/silver. Chartlists and proponents of modern monetary theory define a radically different role of money, as a public monopoly. Contrary to convention, Stephan Zarlenga (2002) opposes private credit creation in favor of nationalization. In addition to these, several other models present a variety of insights about money in current economic system. Evidence of multiple equilibria from these models, particularly in presence of expectations is one interesting aspect, where conventional theories can explain nothing. Given this, Zaman (2014) argues that even in the simplest framework, coordinated understanding that must be agreed upon is necessarily required to determine the role of money in any economy.

Likewise, Islamic scholars also define money in several different ways. It can be a certificate of debt, or a new form of commodity or asset, or a substitute of gold/silver, or an alternate (but not equivalent) to gold and silver that measures the values of goods. There are supporting and opposing arguments for each definition, but Ulema have most consensus for the last one. Ironically, not because of conformity with Nasoos (Quran & Sunnah) but on rational to fit with needs of modern economic setup. Money from first three definitions is not compatible with the modern monetary structure. As it may not be useful for trade and not subject to interest and Zakat etc. This situation requires rethinking and understanding the aspects of money that are not yet revealed to the Islamic scholars.

Given the central importance of Zakat and Interest in Islamic economic system, compliance of money with Islamic Law can be ensured only after having a clear understanding about existing fiat money. There are several important features of money that are not accounted in before arriving at Fatwa on money. In this regard, some aspects of particular importance are discussed in detail.

First, development of a ruling on the basis of analogic method (Qiyas) may not work for current monetary structure. As it is unique in nature; nothing similar to this has ever existed in past. Second, this monetary system is consciously designed and evolved in wake of some historical incidents to meet certain objectives. This system is asymmetric and favors some segments of economy against the others Williamson (1977).

Third, the system is asymmetric even among the economies. US dollar is used as reserve currency in all world as it is given equivalence value and replacement to gold. Therefore, US can print any amount of dollars without restrictions or reserve requirements. This favor to USA have several negative implications for Muslims. Being creator of money, US can exchange paper for real resources including oil, human resources and even political and social dominance anywhere across the world. One prominent example is Iraq war that was entirely financed by printing huge amounts of dollars (seigniorage). The war would have been impossible, had rest of the world refused to accept dollars.

Fourth aspect is that printing dollars levies inflation tax on all countries that keep dollar as reserves. Therefore, USA has a privilege to earn revenue from whole world out of no effort. This huge privilege enables USA to influence and dominate entire world. As per Mahathir Mohammad, USA economy can entirely collapse if oil exporting countries stop accepting dollars. It is suspected that proposal of oil based currency by Saddam Hussein was major reason of Iraq war. Regardless of this verification, there is no other opinion about tremendous benefits USA enjoys from this system. Therefore, it can go to any length to preserve this monetary system and even fight against any attempt of change.

Fifth, mechanism of money is kept complex to avoid anyone challenging the powerful. There are several confusions about the current monetary system and complex functions of modern money. As money is used to serve the interests of powerful, they prefer to prevent world from understanding this mechanism. But massive damage from global financial crisis (2007-08) has led to interesting disclosures. One of those is significant difference in textbooks’ description of money creation and actual process.       

Given these reasons, learning about the complex nature of modern money is most important issue before having rulings of Islamic law. This poses a question on preserving a system that benefits few on cost of many. Current monetary system massively exploits poor. Hickel (2013) reports that interest payments (financed by additional loans) from poor countries to rich are approximately five times higher than what they receive from rich in the name of foreign aid. Moreover, capital flight (including repatriation from multinationals and Swiss deposits of corrupts) from poor countries to rich is worth trillions of dollars. This exploitation of poor could never happen if we had not accepted it permissible to implement modern monetary system in Islamic countries.  

Note: This note is based one first two sections of the article by Dr. Asad Zaman. For complete article and references mentioned see “On the Nature of Modern Money

Diagnosis and Solutions for Problems Facing the Ummah

I gave a one hour talk in Urdu to Ulema at Jamia Masjid al-Muzammil in G11/3 Islamabad on the topic of the title on Tuesday evening 1/21/20. This is linked below:

Detailed explanations in English of most of the topics covered are listed in the outline given below:

  1. Islamic Knowledge: Still Revolutionary after 1440 Years — This question frames all of the work that I do. Is the message of the Quran capable of launching the same revolution today as it did 1440 years ago? If so, HOW? If not, why not?
  2. If we decide, as I claim, that Islamic Knowledge is indeed just as powerful today, then we face several puzzles that must be resolved to support this claim. The most fundamental is: If Muslims are in possessions of this knowledge, why do they NOT launch the revolution created by this knowledge 1440 years ago?  How I struggled with these puzzles for more than 25 years is described in my “Journey of a Thousand Miles”“Journey of a Thousand Miles”.
  3. Muslims agree that the Quran contains complete and perfect guidance for all times to come, but we are also agreed that currently the Ummah is covered in darkness, ignorant, and backwards, almost like that of the pre-Islamic times. What is the disease with ails the Ummah? Without a correct diagnosis, we cannot prescribe a cure. So it is essential to diagnose the problems correctly. My paper on “Rebuilding An Islamic Society” discusses a variety of diagnoses which have been made of our current sickness.
  4. The conclusion that I arrived it is that at the heart of the our sickness is a lack of confidence created by losses (see “A Deep Seated Inferiority Complex”“A Deep Seated Inferiority Complex”). Because we have lost our confidence, we have become extremely impressed by the West, and by Western knowledge. As a result, we suffer the problem of the “Modern Mu’tazila” – Muslims have come to believe that knowledge produced by the West over the past three centuries is more relevant and important for our progress and development than the ancient message of the Quran.
  5. The original problems of the Mu’tazila was solved in three steps by Imam Ghazali.  These three steps are described in detail in: The Ghazali Project: Revival of Deen
  6. The project of burning importance for us Muslims today is to SHOW the relevance and importance of complete and perfect final message of God. In this, we are failing miserably. By acting as beggars ourselves, in terms of seeking knowledge about the SOCIAL SCIENCES (not the Physical Sciences) we tell the world that we have nothing to offer in terms of knowledge about human beings. In fact, while the accomplishments of the West in the natural sciences are amazing, their failures in the Social Sciences are equally amazing — see Origins of Western Social Science. This paper explains how deeply flawed the Western social sciences are.
  7. Because our eyes are dazzled by the glamour of Western knowledge, Muslims have accepted it at face value. Muslim intellectuals have not had the confidence to reject it even when their knowledge conflicts directly with the Quran. It is only after we confidently reject Western Social Sciences (Tahafat al-Falasafa) that we will be able to understand and offer the revolutionary Islamic alternative, which deep understanding of the human psyche available in Islamic teachings offers. For a sketch of how this would work in economics, see: Launching An Islamic Revolution in Economics

The next talk in this sequence was Origins of Banking which dealt with the real nature and purpose the Western Central Banking system, in historical contexts of their origins in England. This was not directly connected with talk above. Continuing from the discussion above, the next talk is: The Greatest Challenge Facing the Ummah



If you ask a typical Pakistani about the geographic distribution of global wealth, the most probable answer you will get is that the West is the wealthiest part of the world. Similarly, if you ask him in which part of the world, maximum individual freedoms are guaranteed, you are almost sure to receive the same answer. Do access to large riches and substantial individual and social freedoms make a nation developed? Not really.

Considering economic development as synonymous with the West is one of the most fundamental myths about economic development. Mad pursuit of wealth is considered as a symptom of moral decay across nearly all civilizations, cultures, and religions of the world. The Bible states that the “love of money is the root of all evil” and that “it is easier for a camel to go through the eye of a needle than for someone who is rich to enter the kingdom of God.” Lao Tzu said, “Do not race after riches … or you will let slip the Heaven within you.” Similarly, Islamic teachings condemn greed, selfishness, and hoarding of money and praise generosity and spending for the sake of Allah.

In nearly all societies, people are praised and honored for character, spirituality, wisdom, heroism, literary, artistic, and many other accomplishments, but not for the acquisition of wealth by loot and plunder. However, in modern society, wealth trumps all other accomplishments. There are no moral bars to the most powerful country in the world, making a naked unprovoked attack on a weaker country, killing one million civilians, and destroying the lives of forty million to secure oil supplies and making profits for the military-industrial complex.

It is only recently that many spectacular failures have led to a questioning of these assumptions. Stiglitz, Sen, and Fitoussi (2009) believe that GNP measures production but not destruction or depletion, such as using up exhaustible resources, damaging the environment beyond repair, and destroying species of plants and animals. Many intangible social costs are ignored. Worse, if environmental hazards lead to sickness, expenses on medical care add to the GNP. Other intangible assets such as stability of families, high moral standards are very important to human welfare, but not accounted for in GNP.

Like material wealth, freedom is highly prized in the West. The French Revolution pro­voked Hegel to believe that “the History of the World is none other than the progress of the consciousness of Freedom.”  There is no doubt that certain types of freedom are extremely valuable. However, freedom is a plastic word and can be reshaped to have many different meanings. Should the poor be free to sell their organs to the rich? Pedophiles are currently demanding the freedom to practice their perversion. This is not what Hegel or other principled advocates of freedom, had in mind.

The use of freedom as a defense of capitalism is one of the most egregious abuses of the word. On the surface, laissez-faire, or let everyone do as they please, appears to be a most egalitarian philosophy. All are to be given freedom. The laborers are free to sell their labor for the market wage, and the capitalists are free to earn suitable returns on their wealth. The grossly inequitable nature of this freedom is not immediately apparent. Millions were given the freedom to starve in Irish and Bengal famines to preserve the freedom of the markets. Grains guarded by the military against hungry mobs were shipped out of Bengal at the height of the famine because higher prices were available elsewhere.

Economic freedom is ideal if the playing field is level, but when a few are enormously advantaged, then “freedom” is equivalent to freedom of the rich to enslave the poor. The poor have no choices, and cannot take any advantage of their supposed freedom.

The truth is that both wealth and freedom could be double-edged swords. As Aristotle noted: “wealth is not the good we are seeking, and is merely useful for the sake of something else.” This knowledge was lost in the West. In a secular society, goals of life were left to be determined by individuals, since common social goals could not be agreed upon. In the absence of common goals, the social agreement was only possible by providing freedom and wealth as the means to all possible goals.  Gradually, failure to prescribe realistic and meaningful life goals at the social level led to these instruments and means becoming prized and valuable goals.  This has led to a social disaster. This apparent paradox is expressed in the Quran as follows:

They who hoard up gold and silver and spend it not in the way of Allah, unto them give tidings (O Muhammad) of a painful doom (Quran 9:34).

This is in direct contrast with the wisdom of Keynes, currently being pursued with vigor all over the world:

The love of money as a possession (… is …) somewhat disgusting morbidity … But beware! The time for all this is not yet. For at least another hundred years, we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not” (Keynes, 1930 cited in Skidelsky, 2001).

Exactly as wealth has a dual nature, so freedom has a dual nature. If used wisely in the pursuit of good ends, it is extremely valuable. If used unwisely to pursue bad goals, it can cause tremendous damage to all. The Quran contains a clear message:

Verily, We did offer the trust [of reason and volition] to the heavens, and the earth, and the mountains:  but they refused to bear it because they were afraid of it. Yet man took it up –  verily, he has proven to be most wicked, most foolish (Quran 33:72).

Freedom places a tremendous responsibility on our shoulders – the heavens and the earth shrank from bearing it. This is our responsibility to be wise (have knowledge of the good), and to be virtuous (to act on this knowledge).  In general, human beings have failed on both counts. They have been foolish, in failing to learn what is the best course of action, and they have been wicked, in failing to act on the knowledge of the good, even when they had it.  Thus, instead of being a blessing, freedom has been the bane of humanity. Those with wealth and power have abused their freedom by using these to exploit the poor and powerless:

Corruption has appeared on land and in the sea as an outcome of what men’s hands have wrought (Quran 30:41).

It is certainly possible to use our freedom for the benefit of humanity, but this requires wisdom and virtue.

Development: Myths and Truths describes 12 myths about development.  Materialism Versus Idealism –  covers the first 3 myths: Central Myths of Eurocentric History: Covers myths 4,5,6 regarding the Rise of the West. The seventh myth is covered in Myth 7: Racial Superiority of Whites.  Myth 8 states that governance systems in Europe in infinitely superior to those of the East – this is discussed in The Myth of Oriental Despotism. Myth 9, “blaming the victims” highlights well-orchestrated propaganda of the imperial powers to blame the masses in the colonies for their underdevelopment.

Zaman, Asad (2013) “Is Development Accumulation of Wealth? Islamic Views,” Afro Eurasian Studies, Vol. 2, Issues 1&2, Spring & Fall 2013, 144-203.

1/3. Motivation for Learning

Transcription of first lecture by Dr Asad Zaman to students of Econometrics at PIDE.

Making Money is an intermediate good to achieve other greater goals. Precious things are not taught in classes rather the things which are taught are far from reality. Rather making money is taught as purpose of life in Economics to maximize utility/ consumptions so as firms are maximizing profits.  This is totally insane thing to follow and pursue. Making money can’t be the ultimate purpose of life rather it is an intermediate good. It is not an end in itself rather a mean to achieve other greater purposes of life. It is totally a meaningless thing that by exhausting life one cane make money and what the money will be spending upon?.  Actually this Jnuon is casted upon people. Once it was asked if you earn money what will you do. I will open a bar. What will you do after opening the bar? I will earn more money.

Here is a thinking point. What else can be done in life?!

There are many precious things that can be done in life with the condition that we use this life responsibly.  In my all academic career purpose of life hasn’t been even mentioned. In real, our every chore should be purposeful. It is not initially taught to earn money but we learn all those things to earn money. There is professional career for which we exhaust the whole life.  Is this really sensible? Is this the only purpose of life? Until or unless we don’t examine and think about the purpose of life we cannot decide about it.

Similar things are deeply rooted in us through long life trainings. There is a great deep insights in this thing that capitalism doesn’t require human it requires workers. When we write that labor is an input in production function then we are doing great injustice to humanity that we are considering human being equivalent to machines as other factors as buffalo is doing in production so as human being are used for production process which make purpose of life as just producing commodities and making profits from those produce.  These things are taught to all of us. But this is totally poisonous. Same is written by J.A. Nelson a Tufts University Prof “Poisoning the Well or How Economic Theory Damages Moral Imagination”. It is dangerous at individual and social level. As it is totally insane for individuals to maximize consumption and for firms to maximize profits.  In real this is not the fact. People do things differently. But this philosophy and belief is trying to get its roots deep in people’s hearts and brain. That if things get over someone then reality of following this pursuit is poisonously dangerous.

                Real education is about the way of spending lives. That how we will be spending our lives?  In real education we need to get answer to this question but in capitalism human is consider as the part of factor of production the more efficient is the factor more rewards it will get. Rather, human being is so unique and precious. No one is like him. No one of the likely person will come before and after you. Not even identical twins have same qualities. Every person’s experience is different than others. Allah tala has placed unique qualities and capacities in a person. Purpose of our life is to explore as the seed has capacity to grow into a powerful tree similarly every person is endowed with the substance that if a true environment is given he can become a wonderful tree. As Allah tala has mentioned that tree of Emaan has deep roots and stems towards skies. Every person has a possibility and capacity to change the world.  This doesn’t mean that some persons don’t have this capability. It doesn’t mean the persons who can score 90% or above and the person who fail to score can’t change the world. This is evident from Quran e Pak that if you murder a person then it is as murdering the whole Humankind and saving a person can save all human being.  It means that every person is not only precious but very much precious.  But this is built in as a potential within human being. If potential is not realized even a seed cannot be grown into a tree same is the case of this precious entitlement of human being.  You have been imparted a very poisonous education which can’t lead to build this potential as  learning and pursing capitalism can’t help to deal with human rather it deals with machines. Individuality of human is extracted in the way to make all people to fit in a machine. And it’s taught that precious are the things which helps to make money. Human capital means humans are worth what they earn. It’s been indoctrinate in our students that after finishing degree you will sold to highest bidder. Where you are not taught to ask the nature of the work to be done rather money is thought to be the most important factor.  If we think that being human we want to live life of our own choice and earn precious things in life then you will have find extraordinary path open for you to guide yourself as;

Tu Hi Nadaan Chand Kaliyon Par Qinaat Kar Gya
Warna Gulshan Mein Alaj-e-Tangi-e-Damaan Bhi Hai
-Allama Iqbal.

Simpson’s Paradox

In “European Transition to Secular Thought: Lessons for Muslims“, I have described some of the reasons that Europeans lost faith in Christianity, and the effects that this loss of faith had on their thought-processes. One of the effects of this loss of faith was rejection of the unseen. Empiricist Philosophy started with David Hume, who recommended burning all books which did not deal with matters of fact and measurement. Hume also noted that causality was not observable — we can see that event Y followed after event X occurred, but we cannot see that Y was caused by X. The empiricist philosophy was dominant in the early 20th century when the disciplines of Statistics and later Econometrics were founded. As a result, these disciplines put heavy emphasis on the observable and the measurable (numbers), and ignored concepts which were not observable (like causality).

Statistics and Econometrics today are done without any essential reference to causality – this is much like try to figure out how birds fly without taking into account their wings. Judea Pearl “The Book of Why” Chapter 2 tells the bizarre story of how the discipline of statistics inflicted causal blindness on itself, with far-reaching effects for all sciences that depend on data. These notes are planned as an accompaniment and detailed explanation of the Pearl, Glymour, & Jewell textbook on Causality: A Primer. The first steps to understand causality involve a detailed analysis of the Simpson’s Paradox. This has been done in the sequence of five posts, which are listed, linked, and summarized below

1-Simpson’s Paradox: Suppose that there are only two departments at Berkeley, and that they have different admit ratios for women. In Humanities 40% of female applicants are admitted, while in Engineering 80% are admitted. What will be the overall admit ratio of women to Berkeley? The overall admit ratio is a weighted average of 40% and 80% where the weights are the proportions of females who apply to the two departments.  Similarly, if 20% of male applicants are admitted to Humanities while 60% are admitted to Engineering, then the overall admit ratio is a weighted average of 20% and 60%, with weights depending on the proportion of males which apply to the two departments. This is what lead to the possibility of Simpson’s Paradox. As the numbers have been set up, both Engineering and Humanities favor females, who have much higher admit ratios than male. If males apply mostly to Engineering, then the overall admit ratio for men will be closer to 60%. If females apply mostly to humanities, their overall admit ration will be closer to 40%. So, looking at the overall ratios, it will appear that admissions favor males, who have higher admit ratios. The key question is: which of these comparisons is correct? Does Berkeley discriminate against males, the story told be departmental admit ratios? Or does it discriminate against females, as the overall admit ratios indicate? The main lesson from the analysis in this sequence of posts is that the answer cannot be determined by the numbers. Either answer can be correct, depending on the hidden and unobservable causal structures of the real world which generate the data.

2-Simpson’s Paradox: This post elaborates on Berk’s explanation of the paradox for Berkeley admissions. His explanation can be understood as a causal path diagram where gender affects choice of department. Both gender and choice of department affect the admissions rate. With this causal structure, gender is a confounding variable when it comes to departmental admission ratios. These must be calculated conditionally on gender – that is, separately for men and women. However, departments are NOT a confounding factor when it comes to the effect of gender on admissions rate. Gender affects admissions through two channels – one is a direct affect on admissions ratios, and the second is an indirect effect via choice of department. Female gender affects admission positively via the direct affect which is favorable. However the indirect affect is negative since females choose the more difficult department in larger numbers. The numbers can be set up so that the negative indirect effect overwhelms the positive direct affect, creating the Simpson’s Paradox. But this entire analysis is dependent on a particular causality structure, and different causal structures can lead to entirely different analyses for exactly the same set of numbers. This is the main point of this sequence of posts – to show the hidden and unobservable real world causal structures MUST be considered for meaningful data analysis. Current econometrics and statistics does not pay attention to causality and hence often leads to meaningless analysis.

3-Simpson’s Paradox: This post considers alternative causal structures for Berkeley admissions which lead to conclusions radically different from Berk’s original analysis. We first consider a case where gender affects department choice, while admit ratio depends only on department, and is completely gender neutral. If females choose more difficult departments, there will be a spurious correlation between admit ratios and gender, creating a misleading impression of discrimination against females. A second example is considered where admissions depend purely on SAT scores, and has no relationship to gender or to department. Nonetheless, if gender affects SAT Scores and choice of department, we can replicate the exact same numbers of the original data, which would create the misleading impressions that departments discriminate by gender, and some departments are more difficult to get into than others. In fact, admissions policy is same across departments, and depends only on SAT scores. The point of these analyses is that exactly the same observed data can correspond to radically different causal structures, and lead to radically different conclusions about discrimination with respect to gender.

4-Simpson’s Paradox: Contrary to the perspective taken by conventional statistics texts, and some forms of econometric analysis (VAR models), we cannot do data analysis without knowing where the numbers come from. The jobs of the field expert and the statistical consultant cannot be separated. To illustrate this point, we consider the same data generated for the Berkeley admissions, and consider it as batting averages of two different batters against left and right-handed pitchers. Then the Simpson’s Paradox takes the following form. Frank has higher batting average than Tom against left-handed pitchers and he also has higher batting average than Tom against left-hand pitchers. However, the overall batting average of Tom is higher than that of Frank. As the manager of the team, which one of the two should you send out when it is critical to get an extra hit or two? If we consider left and right handed pitchers separately, Frank is better than Tom for both, and hence we should send Frank. However, overall batting average of Tom is better, suggesting that we should send out Tom. The answer depends on the causal structure. If the choice of pitchers is EXOGENOUS – independent of the batter choice – then Frank is the better choice. If adversary coach looks at the batter to decide on the pitchers, then the choice of pitchers is endogenous, and in this case Tom may be the better choice.

5-Simpson’s Paradox: To further drive home the fact that data analysis cannot be confined to numbers, and divorced from the real world environment which generated the data, we consider a third interpretation of the same data set used for Berkeley admissions. In this interpretation, we look at the effect of a drug on recovery rates from a disease. The Simpson Paradox takes the form that the drug decreases recovery rates in females, and also decreases recovery rates in males. So, it is bad for males and it is bad for females. But when we look at the population as a whole, we find that the drug improves recovery rate. So, the drug is good for the general population. A causal path diagram shows that gender must be exogenous – it cannot be affected by the drug. Thus gender is a confounding variable, we must condition on this variable to get the right measure of the effect of drug on recovery. Thus we conclude that the drug is bad for everyone, and lowers the recovery rate for everyone, even though the overall data tells us otherwise. But now consider the same data set with gender replaced by blood pressure, and suppose that the drug affects blood pressure. Suppose low blood pressure is a positive factor in recovery, while the drug has a toxic-effect so that the direct impact is negative. However, the drug also lowers the blood pressure, which creates a positive factor for recovery. The combined effect can be favorable, and this is what should be considered when administering the drug.

In the context of the analysis of econometric models (see: Mistaken Methodologies of Science 1), the above five posts on the Simpson Paradox are meant to illustrate the difference between observational models and real structural models. The real structural models incorporate causal structure, which is inherently unobservable. The observational models merely model the observable structures of the data, and can never get at the hidden causal structures. The essential importance of considering the unobservable causal structures is amply illustrated by the set of examples in these five posts.

POSTSCRIPT: I plan to continue developing this course on causality, with the view of building a new foundations for econometrics. Those who would like to receive notifications and materials for this course should REGISTER by filling out the Google Form: Registration for RSIA (Real Statistics: An Islamic Approach). Those who previously filled in this form should not do so again unless their contact information has changed.

Paranoia of Scarcity

Economic textbooks teach us that the fundamental problem of economics is scarcity. We are taught that wants and needs are unlimited, but the resources to fulfill them are limited. Let us evaluate the claim of scarcity that lies at the heart of mainstream economics.

The work of an 18th century economist in England, Thomas Malthus, was influential in promoting the idea of scarcity. In, An Essay on the Principles of Population, he argued that population will always tend to outrun the growth of production despite certain ‘checks’ like birth control, disease, famine and war. Essentially, he was making a case for inescapable poverty and misery. His theories and pessimism permeated the minds of policy makers in Britain and eventually around the world.

Empirical and historical evidence however, tell us a different story – of waste, improper distribution and plunder. The Food and Agriculture Organization of the UN (FAO) estimates that each year, one-third of all food produced is lost or wasted and the largest consumption waste is in Europe and North America. Moreover, we can go over many examples in history showing that scarcity was created where there should have been none. Amartya Sen, a Nobel prize winner, showed that famines were not caused by scarcity of food. At the height of the Bengal famine of 1943, food was being shipped out of Bengal, because the starving poor did not have the money to pay for it. During the times of the Great Depression of 1930s, Michael Rowbotham writes in his book, The Grip of Death, that families throughout Europe and America were starving whilst food was dumped, burnt as fuel, or allowed to rot in the fields. In Germany, workers were rummaging through the slag heaps of the Essen foundries in search of un-burnt fuel, whilst mountains of un-saleable coal had built up in the Ruhr valley. In France, Spain, Italy, Scandinavia everywhere the picture was the same. People wanted to work, but farms and factories could not afford to hire them. The productive capacity of the economy was obvious, and destitution was seen to be blatantly unnecessary. Rowbotham is pointing out the effects of a flawed and thus unjust, economic and financial system, that failed to allocate resources to the needy masses and it created a situation aptly termed as “poverty amidst plenty”. Moreover, the use of interest in the financing of industry, as Tarek El Diwany, in chapter one of his book, The Problem with Interest, eloquently reasons, encourages short-termism, pollution and resource depletion.

When scarcity is mentioned, it is automatically assumed by many that the concept has objective foundations. One has to realize that theories or concepts, may it be scientific or in any other field do not originate and develop in a vacuum. People do such work within a framework of thought – a worldview – and their work is affected by cultural factors and by power structures. To give an idea of how ones worldview shapes ones work, Noam Chomsky, an MIT professor, in commenting on post-modernism, mentions that Isaac Newton’s work had reflections of his religious belief and this fact came to light when his papers started surfacing after WWII. Similarly, Dr Asad Zaman, in his paper, The Normative Foundations of Scarcity, discusses the unapparent assumptions incorporated into the concept of scarcity. Once these hidden assumptions are revealed, one realizes the real beneficiaries of the concept.  

We read in the Quran that God has created this Earth and endowed it with all that is required for survival for His creation (Quran 15:19 & 20). The Islamic understanding is that there will always be differing levels of wealth amongst people (Quran 6:165) and it is one of the ways through which God tests people on noble traits such as generosity, cooperation, sacrifice, patience and contentment. It is inappropriate and illogical to contemplate that an All-Merciful and All-Wise Creator, Created and is Pleased with a circumstance where starvation and abject poverty becomes a norm. When misery becomes common-place, be sure that there is something wrong with how we are living our lives individually and collectively. Individually, we need to strive to exhibit the virtuous characteristics that Islam teaches. Collectively we should within our capacities and circle of influence, work towards developing social and economic institutions that are in line with the letter and spirit of Islam. In the current state, the economic and financial systems are concentrating wealth upwards, impoverishing the environment and the masses.

We should all take comfort that there is no reality to the Malthusian paranoia of scarcity and Muslims in particular should be more convinced of the falsity of the concept. We should also be sure that injustice and oppression do not have a long life, and truth will in due course defeat falsehood. The question we need to ask ourselves is that are we willing to be part of the change towards a better world for ourselves and for our children?

“Relieved of their annual debt repayments, the severely indebted countries could use the funds for investments that in Africa alone would save the lives of about 21 million children by 2000 …” (UNDP, Human Development Report, 1997). The debt and poverty have only increased since then.

The inspiration for the above post is the following post of Dr Asad Zaman, “The Illusion of Scarcity”.