In the last post we briefly went over the value-system of mainstream economics and demonstrated how it fails both as a positive (explanation of how the world works) and normative theory (explanation of how the world ought to be). The normative ideals of Islam such as generosity and cooperation are a stark contrast to self-interest and perfect competition. Compassion and care for others is part of the DNA of Islam.
The rules and regulations in Islam provide us with guidelines at an individual and societal level. When implemented they fundamentally result in spiritual progress and when violated, they lead to spiritual degeneration. The outward result of applying the Islamic value-system is an environment of peace and prosperity for all. The scholars of Islam have encapsulated the purposes of the guidelines as a preservation of life, religion, property, lineage and intellect.
Our Prophet Muhammad (peace and blessing me upon him) demonstrated Islam and gave us a living ideal to emulate and strive for. His teachings transformed the once savage Arabs into examples of magnanimity, social responsibility and brotherhood. The Quran encourages the believers to spend of the good that God has bestowed upon them and not give just give away the bad which we would not accept for ourselves (refer to 2:267 of the Quran). The great rewards of generosity are highlighted in the Quran in many places (refer to 2:261-262).
The Prophet (pbuh) in his last stated “There is no superiority for an Arab over a non-Arab, nor for a non-Arab over an Arab. Neither is the white superior over the black, nor is the black superior over the white — except by piety.” Although an injunction of a similar nature was in the Quran, the Prophet mentioning it in his farewell address highlighted its importance. Social responsibility and true compassion cannot take hold in a society suffering from the disease of racism and a pseudo-biological sense of superiority.
As an example of generosity and social responsibility from the time of the Companions of the Prophet Muhammad (pbuh), is the incident when drinking water was sold at a high price in Madinah (a city to which the Prophet pbuh migrated from Makkah with his followers). The Prophet called on his people to buy the well and turn it into a Waqf (charitable endowment) so people can take free water from it. Uthman (may Allah be please with him), who would eventually become the third Caliph of Islam after the Prophet, bought the well and made it into a Waqf. The institution of Waqf in an important pillar in the Islamic Economic framework and was an important means of funding public goods like mosques, educational institutions, and health facilities.
Another great point of contrast between Islamic teachings and mainstream economics is that the former condemns the worship of whims and desires (refer to 45:23 of the Quran) while the latter regards it as rational and optimal behavior. Human beings are theorized as knowing what is best for them and the results of their free choices (whether genuine or borne out of whims) will ultimately lead to optimal outcomes for the society as a whole. Islam does not advocate asceticism but asks of people not to be wasteful and extravagant (refer to 7:31 of the Quran). It also emphasizes that we don’t know what is ultimately best for us (refer to Quran 2:216). What we teach about optimal human behavior will tend to reinforce the same behaviors in individuals and we will see them being exhibited around us. Do we want to live in an environment of cold, callous and calculating human beings?
Islam’s description of human behaviour is multidimensional and not the simplistic ‘utility maximisation’ view that mainstream economics theorises. Behavioural economists also acknowledge the complexities of human behaviour thus implying the difficulty of encapsulating it in mathematical formulae. Islam highlights the role of the brain (intellect), heart (centre of emotion and moral sense) and the soul (source of desires) in driving our actions. It’s the heart and soul analysis that is absent in conventional treatments of economics. This lack of a holistic understanding of behaviour gives a misleading and defective picture. That is why the theory of rational behaviour fails in a real-world situation. As an example, we are informed from the primary sources of Islam that human beings have tendencies for both, selfish and cooperative behaviours. It is known from human experience that we can strengthen either one through repeatedly choosing it over the other. In life, there is a constant struggle to do what is ‘right’ (morally) by overcoming the negative prodding of the soul. Eventually the soul complies and aligns with the moral sense and the individual makes spiritual progress. In essence, the individual and societal injunctions of Islam are geared towards elevating the human beings spiritually, resulting in, as mentioned earlier, peace and prosperity for all.
The vast majority of people today do not really understand what money is and where does it come from. The misconceptions and ignorance surrounding money, make the masses oblivious to the key determinant of many economic, political, social and environmental problems that we face today.
The use of paper as money is connected to the roots of modern banking that go back to about 400 years. Before that humans have used commodities as money, and more popularly, precious metal, like gold and silver. The key differentiating factor between paper and commodity money is that the latter has intrinsic value. The value of paper or fiat currency in general is because of the decree of an authority and its intrinsic value is insignificant and even negligible in today’s context.
In our economies today, contrary to widely held understanding, the vast majority of the money is created by the commercial banking system and as debt. We fundamentally have a debt-based monetary system – money supply expansion is accompanied by a more or less continuous increase in the amount of debt in the economy as a whole. The Bank of England accepted this fact in a 2014 Quarterly Bulletin:
“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. … One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them. … Just as taking out a new loan creates money, the repayment of bank loans destroys money.”
Since the government also in most cases, has to borrow (its own fiat currency) to finance its expenditures, both public and private debt as a proportion of GDP, exhibit sustained long-term increases in developed and developing economies. Modern economies depend on debt to have a money supply which is ludicrous. Such a monetary system is also intuitively unjust when one realizes that an institution (the banking system) is creating the money ex nihilo and making the society liable to pay it back with interest! The repercussions of such a system are pervasive as money is at the heart of any economic system. It is no surprise that Mayer Amschel Rothchild, founding father of the Rothschild banking empire, is quoted to have said “Give me control of a nation’s money and I care not who makes the laws.”
With the inevitable high levels of indebtedness that such a monetary system brings, come frequent crisis (beginning from the financial). Schularick and Taylor, in their paper Credit Booms Gone Bust, give evidence of the same based on more than 100 years of data. Moreover, the banks creating and destroying money frequently and in large amounts, in accordance with their expectations on profitability, are primary instigators of the recurring boom and bust cycles in our economies. The fuel for a boom is provided by more than ample money and a bust is characterized by money contraction. The high economic and social costs of these cycles are obvious to most (see “This Time Is Different: Eight Centuries of Financial Folly” by Reinhart and Rogoff).
In order for a monetary system to be just and stable, we need to return to what money used to be – a debt-free instrument of exchange. An attempt was made in the 1930s by what became known as the Chicago Plan in the aftermath of the Great Depression. It was conceived by Chicago School economists and backed by leading thinkers in the economic sphere. They understood the core problem and based their proposal, as Michael Kumhof appreciatively points out in The Chicago Plan Revisited, on historical experience and common sense, undeterred by the fact that they did not have econometric models to demonstrate the desirability of the proposal. The Chicago Plan essentially proposed to take away the money creating power from the commercial banks and give this power solely to the government. The banks in such a system would as a result only lend what they have and not be able to create liabilities from nothing. The government would create the needed quantity of money debt-free and pump it into the economy using different channels like public spending. Another important feature of the plan was the separation of credit from the payment system which currently is merged into a single institution resulting in financial instability.
From an Islamic perspective, the core of the Chicago Plan is in line with Islamic principles, highly desirable and needed. Once the plan is combined with other features of Islamic Law, particularly the abolition of interest, we will be on our way towards a true Islamic monetary system. Banks in such a system would be of two distinct types:
Deposit taking for safe-keeping (these will form the payment transmission system)
Investment banks (for providing investment advisory and partnership)
The Chicago Plan was successful thwarted by those who seek to benefit from this oppressive system. The discussion of the fundamental faults in the financial system went off the mainstream radar since then, and cosmetic changes here and there are usually proposed and implemented. An Islamic version of this plan is an urgent need of Muslims lands today to realize the great economic and social benefits that it will bring, thus relieving the masses of the misery inflicted by the debt-based, interest-bearing monetary system.
Michael Rowbotham, in The Grip of Death, describes our current state as follows:
“Throughout the economy, the scramble to meet costs and repay debts in a debt-based financial system introduces an unrelenting pressure, fostering trends which utterly dominate industry, agriculture and the provision of services. It is a pressure that penetrates every corner of our lives, binding us to permanent employment, distorting our economies, forcing them to grow and change at an ever increasing rate and compete with ever greater ferocity. The way this pressure takes effect … gives far greater substance to the chilling warning by Lord Stamp. ‘If you want to be slaves of the bankers, and pay the costs of your own slavery, then let the banks create money’.”
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.
This is the second post that will cover a 12 part video series containing an invited talk by Dr. Asad Zaman on Islamic Economics at the University of Indonesia. The first post is here.
In Part 4 of the talk, Professor Zaman comments on value – a concept of seminal importance in economics. How do we value a human life? The message of Allah to humanity is that each life is precious and unique and that each human being is as valuable as the whole of humanity. On the other hand, the message of modern mainstream economics is that the value of a human life is merely equal to the value of what it can produce or consume. According to this materialistic view, humans are not beings but they are resources. All of modern economics follows from this unfortunate ideological error. An error that has ironically caused us to incur enormous losses as a human race. Listen to the rest below.
Dr. Asad Zaman, Talk on Islamic Economics at the University of Indonesia, Part 4 of 12.
If economy is called back bone of the society, it may not be wrong. However, it is vital to understand upon what belief systems the foundation of economy is based. This will lead to the understanding of how the economic agents behave while performing their economic activities, be it employment, business, economic legislation or anything related to economics of the society or nation. In the modern world the nations are facing challenges in prospering their countries. as a solution set, along with other economic systems, the name of the Islamic Economic System also surfaces, nonetheless with little common person understanding. This post deals with the question of What is Islamic Economics. The answer to this apparently simple question is surprisingly complex. This article can only provide a brief sketch.
Early in the 20th century, about 90 per cent of Muslim lands were colonized. The two world wars substantially weakened the European powers, and enabled liberation movements to succeed all over the globe. At the time, there were two competing models for organizing economies: capitalism and communism. Revolutions are driven by ideologies, and leading Islamic thinkers like Maududi and Baqir Al-Sadr offered a third alternative as the natural option for newly-liberated Muslim countries. They argued that Islam had its own distinct economic system, and this system was superior to both capitalism and communism. For reasons to be discussed, this idea of constructing a radical alternative to dominant economic systems was not realized in the post-colonial period.
Colonial educational systems had explicit goals to create a buffer between the rulers and the colonized, as described by Lord Macaulay in his famous Minute on Education: “We must at present do our best to form a class who may be interpreters between us and the millions whom we govern; a class of persons, Indian in blood and color, but English in taste, in opinions, in morals, and in intellect.” These intermediaries were called ‘compradores’ in Latin America, Black Skins with White Masks(Frantz Fanon) in Africa, and Brown Skins with White Masks (Hamid Dabashi) in Asia. They ran the vast administrative and bureaucratic structures on behalf of the colonizers, and naturally came into power following independence. These compradores were trained to believe in the superiority of the colonizers, and to treat their heritage, ancestors and indigenous society with contempt. Plans for an Islamic economic system were put on the back burner as Islamic groups engaged in the struggle to wrest control from secularized and Westernized compradores. For complex sets of reasons, these struggles were unsuccessful and the compradore class succeeded in retaining power throughout the colonized lands.
Second generation pragmatists saw that the required revolution did not appear to be forthcoming. They abandoned the grand vision of the founders for a just and equitable alternative to both capitalism and communism. More limited goals were targeted. Instead of rejecting capitalist institutional structures, the new Islamic economics (nIE) attempted to tinker with capitalism in order to make it conform to Islamic principles. A popular formula for defining the subject became: nIE = Capitalism – Interest + Zakat.
Large numbers of second generation Islamic economists acquired professional training in modern economic theory. In the course of their study, they came to believe in the epistemological claims of the discipline. Economic theory claims to be a positive discipline, on a par with the physical sciences. The second generation was unable to see through these claims, and came to regard economic laws as being on a par with physical laws: objective, factual, indisputable and without normative elements. The laws of supply and demand were seen as having the same validity as the law of gravity. This misconception was fatal to the project of developing a genuine Islamic economics. Whenever the second generation saw a conflict between Islamic principles and economic theories, they assumed the validity of economic theory, and sought to rationalize or modify Islamic principles so as to remove the conflict.
This attempt to harmonize Islam with economics has been abandoned only recently, after the global financial crisis revealed that economic theory, the ‘emperor’ of the social sciences, has no clothes. Nobel laureates were led to ponder why the entire field has gone astray, leading economists responsible for crafting policies which led to the crisis confessed to making huge mistakes, while the US Congress set up a committee to investigate the failure of economic theory to provide warnings about the impending crisis. The root cause of this failure is that modern economics claims to be an objective description of reality, while in fact it is a normative and prescriptive theory. Economics assumes that everyone acts selfishly to maximize lifetime consumption, without any concern for others. Furthermore, this is rational behavior, which leads to optimal outcomes for society. For example, Nobel laureate Milton Friedman vehemently rejected the idea that businesses have social responsibilities and asserted that their only responsibility is to maximize profits, regardless of social costs.
Evidence has accumulated from many different fields of study that the economists’ description of human behavior is not empirically accurate. Human beings are naturally inclined to be cooperative and generous, even to the extent of giving their lives to save strangers. Describing competition and greed as natural and rational actually creates these behaviors, so the economists learn to be more selfish than their classmates in other disciplines. The global financial crisis was caused by the greedy behavior of the financial industry, which sold mortgages to unqualified people, making profits from a process that wiped out lifetime savings of their customers. Such behavior was enabled and created by standard MBA teachings, which place the bottom line above all other considerations.
Instead of a jungle, with survival-of-the-fittest as the ideal form of social organisation, Islamic economics prescribes generosity and cooperation as the behavioral bases for an ideal world. The Holy Quran is full of encouragement to spend generously on others. Just like economic theory prescriptions of selfishness and competition create such behaviors, ideals of generosity and cooperation also create such behaviors. Throughout the thousand-plus years of dominance of the Islamic civilization, basic needs of the population were recognized to be a social responsibility. Education and health needs were not commodities to be sold in the marketplace to those who could afford them. Rather, society arranged to take care of these needs for all members. Everybody can see the outcome of the competitive jungle of modern economics in the form of stark inequality, misery for billions, combined with luxury for a select few. At the core of Islamic economics is the idea of social responsibility — as a society, we are collectively responsible for the needs of all members, and not just for those who can earn enough money to purchase these needs in the marketplace. Is this not an ideal worth striving for?
This is the first post that will cover a 12 part video series containing an invited talk by Dr. Asad Zaman on Islamic Economics at the University of Indonesia. Part 1 and Part 2 contain the beautiful inaugural ceremony of the gathering.
The talk begins near the end of Part 3 of which we will present a gist. We must understand that economics is the new religion of mankind and therefore when we start to study it, we must understand first what we are studying and why we are studying it. It is quite natural for people to experience what is called cognitive dissonance when they hear something new or strange. As people, we tend to understand something new in terms of what we already know. To appreciate Islamic economics, we must first become comfortable with the idea that most of what we know might be challenged and the quest for economics actually starts with an inquiry into who we really are. Please watch the video here:
Dr. Asad Zaman, Talk on Islamic Economics at the University of Indonesia, Part 3 of 12.
[bit.do/azai4] Final Part 4 of talk on “How Islam applies to Economics” By Dr. Asad Zaman, Ex-VC PIDE English Re-Recording of Original 1hr talk in URDU at Econ Dept. Karachi University Monday 16th Sept 2019 — 14m Video of Part 4:
So we started this talk with the question: “(How) Does Islam apply to modern economics?”. Conventional textbooks seem to be completely unrelated to Islam. As we have seen, this is because conventional economics is about a market society based on humans lives for sale in a labor market, competition, greed, individualism, and hedonism. These values are opposed to Islamic values. Islam does NOT apply to modern economics – it tells us to reject the whole thing, and build a new economic system on entirely different foundations. Islam works on TRANSFORMING human behavior towards Cooperation, Generosity, Social Responsibility. Of course, we may object that this is too idealistic – we can never create a perfect society, where everyone acts like an angel. The answer to this objection is that Islam is concerned with PROCESS, not with OUTCOMES. That is, we are required to WORK for change, to struggle for a good society. We are not responsible to achieve success. The Prophet SAW was tasked with the responsibility of taking the Deen of Islam to all of mankind, but he was told that Guidance was solely in the hands of Allah. Similarly, we are asked to struggle to spread the ways of Islam, but the outcomes of our efforts are solely in the hands of Allah.
How can we work to create change? One effective technique is to replace conventional economics courses with radical replacements, which provide a critique of standard theories, and provide Islamic alternatives. I have developed many courses which provide alternatives to conventional courses on the basis of these principles. Before I discuss the courses, I want to provide some general advice to Muslim students and teachers of economics.
Advice to students: Students frequently become frustrated and unhappy when they learn that they have been taught false theories. It is important that you don’t give up, drop out, abandon study because all economics is based on wrong ideas. Even though economics is all wrong, these ideas are running the world today. We cannot understand what is happening in the world without learning these ideas. To have any chance of creating a viable alternative, we must understand these ideas. So we must study harder, to learn the weapons being used by the enemies.
Advice to teachers: We must teach economics in a DIFFERENT way. Don’t teach it as the TRUTH. Teach it as a theory which is used to make policy decision. Don’t focus on micro-details; how to do the calculations. Instead, understand and teach the CONCEPTS beneath the theories. See through math and technicalities, as discussed earlier. Learn how these theories are used to make policies. Teach students how to DRIVE the car, not how the ENGINE is constructed. Since the Western educational model does not teach these things, you will have to learn them on your own. My courses, described below, will provide a lot of help with them. Become a student, and learn along with your students. Use Fellow Traveller model: we are all learning together, but I am a senior learner, a little bit more experienced than the students. See my lectures on How to Become A Great Teacher for more details.
SOME NEW COURSES: As explained, I have developed alternatives to conventional courses. One of these courses is Advanced Microeconomics I [shortlink: bit.do/az4micro] This starts out by covering the Hill & Myatt: Anti-Textbook on Microeconomics. The purpose is to create a link with conventional micro. The student will learn all of the basic concepts taught in conventional micro, but in a critical fashion. The textbook goes through standard theories of micro – in context of how they are USED in the real world. Explains why the theories are wrong, and why they lead to wrong policies. There is a serious question which emerges – why do wrong theories continue to be taught, even though there is huge amount of evidence against them? The answer has to with how Power shapes Knowledge. Theories which are taught serve the interests of power. Theories like Marxism are rejected and ridiculed, not because they are wrong, but because they are harmful to the rich and the powerful. As I have explained in detail, modern economic theory is really Economic Theory of the Top 1% (ET1%) – it protects the interests of the rich and the powerful, while pretending to be objective and neutral.
This is why Islam help us launch a revolution in Economics. We need to construct a theory of the bottom 90% – ET90% – which protects the interests of the weak and powerless masses, against the rich and wealthy. As a first step, we must learn to see through the deception of conventional economics. We must study conventional theories, not as an apprentice learning the truth, but as an external observer watching a magician to learn the secrets by which he deceives the public – see Thousand Snakes: Image and Reality of Western Economics.
One of the key deceptions is the WRONG model of human behavior: homo economicus. The idea that we are all selfish and greedy, and that this is rational behavior, serves to justify and allow the rich an powerful to do whatever they want. Actually, this concept is contradicted by actual human behavior. This theory is used to justify laissez-faire economics – just let everyone do whatever they want. By the ridiculous theory of the invisible hand, if everyone behaves selfishly, the society will automatically reach the best results. See Game Theory for Humans with Hearts.
The Islamic Perspective on this is that economists have the wrong model of human behavior, and also the wrong model of what makes us happy. We can create a new basis for Micro if we start by differentiating between NEED and WANT (as discussed earlier, and in greater detail in “Scarcity: East and West”). There is enough for everyone’s need, but not enough for everyone’s greed. If we make the objective the fulfillment of NEEDS, discouraging fulfilment of Wants, and encouraging people with excess to give to those who are in need, this is enough to launch a Revolution in Economics.
I have developed new courses in Microeconomics, which are a compromise between the full ideal Islamic course, and the current neoclassical economics courses. Advanced Microeconomics I is based on using existing alternative approaches. One of these is Behavioral Economics, which studies actual behavior of human beings, instead of the axiomatic behavior which is mathematically predictable. As we have discussed, many development in Islamic Economics can be brought into the picture, to provide genuine alternatives – see Islam’s Gift: An Economy of Spiritual Development. Closely related is Experimental Economics, which engages students in real world experiments, which allows them to see that actual human behavior is very different from what economic theories say. In particular, human beings do not optimize; they use heuristics for decision making. This makes it impossible to calculate outcomes using simple mathematical formula. A solution is provided by the techniques of Agent Based Modelling. This allows us to deal with Heterogeneity (many different types of agents). Instead of mathematically calculating outcomes, we can simulate results on a computer. This allows us to go beyond the “equilibrium” theories of economics, which belong to nineteenth century physics. Another new development discussed in our new approach to micro is Evolutionary Game Theory. This allows to model change over time, without having any equilibrium in mind.
Advanced Microeconomics II (2018): This course is based on Holt & Davis text on Experimental Economics, it examines conventional micro theories within an experimental framework. By being subjects in experiments and by running experiments themselves students learn the vast differences and contradictions between economic theories and real-world markets. Course provides students with deep intuition about real world economics which is not available by studying formulas as in conventional courses.
Similarly, I have developed pedagogical materials and videotaped lectures on more than TEN courses. These educational materials have a Radical Design, based on Islamic Pedagogical Principles. Testing them on students, we find Radically improved educational outcomes. The principles involve teaching students how to DRIVE, and not technicalities of the Engine manufacture. That is, our courses equip students with real life skills of value in solving real world problems. This is based on the Islamic principle of providing BENEFICIAL knowledge, and of avoiding useless knowledge. In addition, teachers and students should make the intention to use knowledge to serve mankind, out of love of God. For more details about these courses, Lookup ONLINE COURSES on asadzaman.net In particular, for Advanced Macroeconomics, see: bit.do/az4macro This course is based on integrating history with macro – the goal of the course is to study the real world events which led to the development of macro. Students will learn about the Great Depression, the Gold Standard, and its replacement by the Dollar in the Bretton Woods Agreement. Many aspects of the changing and evolving global economic and financial systems are discussed and studies in the new advanced macro course. The point is to enable the student to understand real world macroeconomics issues, rather than mathematical theories based on bizarre assumptions made just to make it possible to do the calculations with pencil and paper.
[bit.do/azai3] Part 3 of talk on “How Islam applies to Modern Economics”, re-recorded in English. Original one hour Urdu talk on Monday 16th Sept at Econ Dept, Karachi University by Dr. Asad Zaman, Ex-VC PIDE. For previous parts, see Part 1 and Part 2. 18m English Video:
1800 Word Summary of Part 3
The challenge we face today is to Re-think economics from GROUND UP. The greatest obstacle in our path is shock-and-awe of the West, and the Western intellectual apparatus. WE must not be scared of conventional economics – its is DESIGNED to shock-and-awe, and prevent us from thinking. We must not be discouraged from this study; Economics is the new religion of mankind, and the driver of policy, thought and action, all over the world. This religion idealizes a society based on individualism and competition, driven by greed and hedonism. As opposed to this, Islamic teachings aim to create a society based on cooperation, generosity, and social responsibility.
Mathematics is used a weapon, to prevent outsiders from criticizing economics. Many top economists have criticized the over-use and abuse of mathematics. For example, Krugman said that “Economists went astray because they mistook beauty of mathematics for truth.” For a detailed discussion, with many quotes and references, see “The Overuse of Mathematics in Economics: Nobel Resistance”. One simple example of absurd mathematical models is the theory of utility maximization, which all economists learn. If I were to say to you the following: “See that old lady purchasing tomatoes? Do you know what she is doing? She has a multivariate utility function. She is now computing the first order partial derivatives with respect to the goods she is planning to purchase. Now, she just put in the budget constraint, and is solving the system of n nonlinear equation. Great! She just learned that she must purchase 3 pounds of tomatoes to maximize her utility!”. Every economics students laughs – but they all took it seriously when it was taught to them in their textbooks. This is how shock-and-awe operates. Completely absurd theories, contradicted by our personal experiences, observations, and thoughts, are accepted on the authority of the West.
In fact, Nobel Laureate economists, who have spent their lives in the profession, also recognize the absurdity of the theories currently dominating economics. For example, Robert Solow remarked that theories of Lucas and Prescott are based on crazy assumptions, and to discuss mathematical details of these theories means that you have accepted these assumptions. Instead, you should just laugh at these theories. See “Quotes Critical of Economics” for a large set of quotations deeply critical of current economic theories. A large amount of recent work shows that complex systems cannot be described via mathematics – the formal symbols are not built to handle real-world complexity. Instead, we must use computer simulations, which can deal with the level of complexity which exists in the real world.
Instead of being deeply impressed by fancy mathematics, we must learn to see through the fancy assumptions and complex Mathematics. The way to do this is to note that all analysis must start with some real world problem, which we can all understand. This problem is then translated into symbols and fancy mathematics, on the basis of simplifying assumptions which are actually quite crazy, if you can understand them. The trick is that no one understands the mathematics, so you can get away with murder. After translation into mathematics, a mathematical solution is produced, and then explained in real world terms. If we realize that all the fancy mathematics is useless, misleading and wrong, then we can see through the deception. Just Look at the Question (understandable) and look at the Answer (also understandable). IGNORE the math which is useless. Instead of the wrong mathematics, look at the MOTIVATIONS which lead to these answers. We illustrate this process by a few examples below.
Economic theory tells us that Price = Marginal Cost in competitive markets. If someone was pricing above marginal cost, than a competitor could sell the product cheaper and make a profit. Instead of the mathematics, look at the world around you. We find that Insulin prices are $300 in USA, and $10 in LDCs Similarly, a vial of life-saving Epinephrine is around $600 in USA, and $1 in Pakistan. The same drugs which sell for $30 in Canada, sell for $300 in USA. Is it possible for price to be marginal cost in such situations. Instead of mathematics, think about WHY this argument is being made. Actually, it is being made to justify the extortionary prices being charged by greedy corporations, which bankrupted millions of households to make profits in the Global Financial crisis. Economic Theory teaches us that firms are Price Takers, but a Survey by Alan Blinder shows that more than 80% of firms SET prices. They are Price Makers. Lots of empirical evidence exists to show that price equals marginal cost theory does not work in the real world. Why do textbooks keep on teaching these theories, which are easily proven false? Because these theories support the rich and the powerful corporations which are actually running the world, behind the cover of democracies.
Consider another basic principle of economic theory. Does Wage = Marginal Product of Labor? Consider all people in Govt Grade BPS 19 – They all receive roughly the same pay – are they all equally productive? Similar categorization occurs in all industries. CEO pay is now 300 times median worker. This has increased from 30 times since financial deregulation in the 1980s. Productivity of CEOs has not gone up, but their pay has become ten times greater. Similarly, Labor productivity has increased greatly, but real wages have remained stagnant. Why do economists insist that wages equal marginal productivity in face of all this evidence to the contrary? This is because it allows billionaires to say, like Qaroon, that the money I have earned is due to my cleverness – it is justified reward from my productivity, instead of use of power for exploitation of the weak and powerless. Looking at the power structures of a society gives us a deeper understanding of the Marginal Productivity theory compared to the understanding of the mathematics behind the theory.
As a final illustration, let us look at the most fundamental of all economic theories. Is price determined by Supply-Demand? Card & Krueger: Myth & Measurement: Data on Minimum Wage shows that increasing minimum wage leads to increased employment, contradicting the Supply and Demand models. A huge amount of empirical evidence exists to show that supply and demand theory does not work in the labor market. The central argument of Keynes in his General Theory of Employment, Interest, and Money was that real wages were NOT determined by Supply and Demand. A simple evidence and proof of this was that high unemployment persisted for more than ten years – the real wage did not adjust downwards to eliminate excess supply of labor. For more details, see “Understanding Macro: The Great Depression”
So, we come back to the core question addressed in this talk: How can Islam help us launch a revolution in Economics? FIRST: We must master conventional economics – not as a body of KNOWLEDGE – but as a (wrong) conceptual framework which is currently used by vast numbers of people to understand the world around us, and to make policies which affect the lives of millions. A key problem with this framework is that it uses completely wrong models of human behavior. Islam provides us with alternatives based on REALISTIC theories of human behavior, from Islamic sources. As we will discuss in part 4 of this talk, correcting fundamental methodological mis-understandings at the heart of Western Social Sciences allows us to launch a complete revolution in Micro-economics, Macro-Economics, Statistics, Mathematics, Econometrics. From being third rate followers, copiers and imitators of the West, we can become world leaders in these fields. More details will be given in the final Part 4 of this talk. Here we provide a brief description of the process by which economic models currently in use are constructed, to debunk their mystery.
APPENDIX (not covered in video/talk): The NATURE of mathematical models in Economics and Econometrics. “To a man with a hammer, everything looks like a nail”.
Everyone, economists included, realizes that the real world is too complex to be described mathematically. A MODEL is built by simplifying the world to make it possible to apply mathematics. What most people do not realize is that the simplification is NOT done on the basis of what describes reality best. Rather the simplification is done on the basis of what mathematics we have available to us – the world is re-shaped to fit calculus, rather than expanding mathematical tools to fit the world. Human behavior is too complex to model, so human beings are replaced by the robots – homo economicus – who behave according to mathematical laws. If we put more than one human being in our model, the formulae become too complex, so DSGE models contain only ONE human being! Completely absurd assumptions are made, because the mathematical calculations can ONLY be done if the world fits these absurd assumptions. Recently, Agent Based Models are becoming more popular. These allow for more complex and diverse forms of human behavior and allow for hundreds of agents within a model. The outcomes cannot be calculated mathematically by hand, but it can be fed into a computer to get simulation results. When we do this, we find that the real economy is drastically different from simplified mathematical models used by economists. There is no surprise that economists and econometrician completely missed the Global Financial Crisis. Their models were too simple to capture the elements which created the crisis. Robert Solow remarked that with only one person in the model, it is not possible for one agent to deceive another, which was the cause of the GFC. What is surprising is that after the crisis, there has been no change in the economics profession. Despite solid evidence that these theories are wrong, they continue to be taught. The established economists have too much to lose by allowing a revolution, so that are preventing all attempts at change. This makes an Islamic approach all the more promising.
[bit.do/azai2] Part 2 of Talk on “How Islam applies to modern subjects” By Dr. Asad Zaman, Ex-VC PIDE at Econ Dept, Karachi University, Mon 16th Sep. 17m English video is followed by 1800 word summary of this portion. FULL 1hr talk in Urdu: How Islam Applies to Economics.
1800 word summary of Part 2
Let us begin with a quick summary of Part 1:Applying Islamic Teachings to Economics . Modern Economics textbooks make no mention of religion or morality – creating impression that Islam is irrelevant. But this is very strange because ethics and morality are involved everywhere in economics. Pricing of food, medicines, and education is a key to providing for basic rights to everyone, and this obviously involves ethical considerations. So, it is a puzzle WHY modern economics completely ignores these issues. To understand the answer, we must think about HOW this subject of modern economics came into existence. This requires looking at the history of Europe in greater detail, because this subject was born in a particular context, and created for a particular purpose.
Very briefly, cutting a long story short, European history shows almost continuous religious warfare until the Peace of Westphalia in 1648 (see European Transition to Secular Thought). This led to the necessity of creating a science of politics and economics which would be equally acceptable to all parties, regardless of their religious beliefs. This was required to create a basis for peace among the different parties with different religions and different moralities. Now, Economics CANNOT be done without morality. So new sciences of Politics and Economics were created which PRETEND to be Objective Knowledge equally acceptable to all human beings. However, this objective knowledge HIDES morality under the neutral label of rationality. This led the creation of a NEW RELIGION for mankind, which pretends NOT TO BE A RELIGION.
As European intellectuals became disenchanted with religion, they reject Christianity, afterlife, Day of judgment, and God. Jeremy Bentham called himself a Prophet of new religion, meant to replace Christianity. This religion is named and condemned in the Quran as ‘the worship of desires’. Once we deny the afterlife, it is RATIONAL make the Goal of life “the Maximization of pleasure from consumption.” Some of the Keys Beliefs of the religion of Secular Modernity are summarized below:
Goal of life: Maximize Wealth, Pleasure, Power.
Everyone has right to pursue these goals.
All is fair in love and war – No rules in international arena
Rule of Law within one nation, to minimize conflicts.
Laws are created by votes, votes can be purchased, laws created to favor rich and powerful.
Internationally, no one has power to enforce rules upon other nations, so all nations can pursue their desires, without anyone to stop them. Anyone who has the power can do whatever they want – might makes right. The power to carpet bomb a nation, killing millions of innocent civilians, and destroying all infrastructure of the country – schools, hospitals, factories, power plants, etc – creates the right to do so. Within one nation, it is better to have peace and harmony, and the nation has police and power to enforce laws. So, conflicts between goals of different people are resolved by the rule of law. Of course, laws are passed by votes and votes can be purchased, so it is easy to document that laws are made to favor the rich and powerful over the common people all over the world.
The unique characteristic of this new religion of secular modernity is that it sells itself as rational and objective knowledge. This has created a situation where the power and glory, the global dominance of the West, has caused this Religion to be spread to all of mankind. Muslims have adopted this religion without any realization of the conflicts between Islam and an economic and political theory derived from the religion of secular modernity.
The Religion of Economics is portrayed in textbooks as being Positive, Descriptive, Rational. But deeper examination shows that this is not true. Human beings DO NOT maximize Utility. MANY experiments establish this conclusively. One very simple experiment is called the Dictator Game (variant of the Ultimatum Game). We pick two people A and B, and put PKR 1000 on the table between them. Player A is made the dictator and he can choose ANY SHARE to keep for himself. The remaining portion is given to Player B. According to economic theory, player A would maximize utility by taking all of the money for himself, leaving none for player B. However, human beings do not behave like this. Around one third of the people split equally, and the vast majority, more than 90%, leave something for the other player. This means that the vast majority DOES NOT MAXIMIZE. The very few that do take everything are almost always economists! While ordinary people understand that normal human behavior is to cooperate, share, and help each other, economists are blinded by their theories, and find it very hard to understand generosity, cooperation, sharing, etc.
Conventional economics is based on a theory of human behavior – called homo economicus – which has human beings who are heartless and soul-less. Islam provides us with new foundations to construct a radically different theory of economics. (Q7:31) “O children of Adam, take your adornment at every masjid, and eat and drink, but waste not by excess consumption. Indeed, He likes not those who commit excess.” This provides a clear statement of the moderation of Islam – we can freely eat, drink, and even wear beautiful clothes – enjoy life, so as to be thankful to God for His great blessings. BUT we should not be wasteful. We are encouraged to fulfill our Needs and even Comforts, but we are strongly discouraged from following Idle Desires. (Q45:23) “Have you seen he who has taken as his god his [own] desire, and Allah has sent him astray due to knowledge and has set a seal upon his hearing and his heart and put over his vision a veil?” Following idle desires is strongly prohibited in many different Ayat of the Quran.
In contrast to this, Samuelson and Nordhaus (1989, p. 26) state that economists “must reckon with consumer wants and needs whether they are genuine or contrived”. Stigler and Becker (1977) say that “Tastes are the unchallengeable axioms of a man’s behavior”. According the standard assumption of consumer sovereignty, an economist is not allowed to question how tastes and wants are determined. This creates a radical difference between Conventional Economics and Islamic Economics, going to the foundations of the subject. The JOB of the Islamic Economist is to Fulfill Needs of all of humanity, and even of all of the creation of God. At the same time, we should DISCOURAGE people from wasteful and unnecessary consumption. Our job is to Feed the Hungry, and take care of basic needs of ALL human beings, and of ALL the creation of God. In dramatic contrast, Western Economists say that we should fulfill Needs AND WANTS. This is what leads to scarcity. Needs are fixed and low, and can easily fulfilled with currently available resources. But when we want fulfill BOTH needs and wants than this is an impossible task. Idle wants are beyond fulfillment, and they expand as more material is generated. Furthermore, according to economic theory, production takes place to fulfill demand which is backed by money. This means that if poor children demand bread but have no money, this does not count. Instead, production of Mercedes Benz for billionaires who can afford them has much greater priority. Even though this is clearly a moral judgment, it is not depicted as such in economic textbooks.
The Main Problem of Western Economics is SCARCITY, which is created by the attempt to fulfill all of the wants of everyone – an impossible task. The strategy is GROWTH – if we produce more, then maybe we can fulfill all of the wants. In fact, this is impossible, because wants expand as they are satisfied (unlike NEEDS, which can be fulfilled). This is now known as Easterlin’s Paradox – even though growth has created huge amounts of goods, people have not become happier. More and more wealth DOES NOT lead to a happy society. Greed, selfishness, individualism, and hedonism lead to misery for everyone on the planet. See The Illusion of Scarcity.
Islam provides us with a different diagnosis and accordingly, a different solution. First, we insist on fulfilling basic needs, and actively discourage fulfillment of WANTS. Desires of anyone should have less priority than needs of others. The prohibition of Israf & Tabzeer would free up lots of goods, which could be used to fulfill basic needs. For example, today the money being spent on OBESITY, caused by excess consumption, would be enough to feed the entire planet. This means that excess and wasteful consumption not only harms the consumer, it keeps essentials away from those who need them. The solution to these problems lies in changing social norms. The Prophet Mohammad SAW came to an ignorant and backwards society. The message of Islam transformed those who enjoyed killing their enemies, into those who would feed others while remaining hungry. Those who killed their own daughters by burying them alive, became those who would feel the pain of a bird deprived of its nestling. The solution Islam provided to the economic problem is based on the concepts of Cooperation, Generosity, Social Responsibility. These are opposed to the foundations of modern economics which are competition, greed, individualism and hedonism.
Today’s Challenge for Muslims is to Re-think economics from GROUND UP – we need to change the foundations; we cannot make minor modifications. The greatest obstacle in our path is the Shock-and-Awe of the West. We believe that they are so smart, and so far ahead of us, that we are not permitted to do our own thinking. Instead, we must borrow from them and copy them blindly, without thinking. This disease, an inferiority complex, has been created by centuries of defeat. The remedy is to NOT be scared of conventional economics. The mathematics they use is DESIGNED to shock-and-awe, to prevent us from thinking about the cruel concepts which are hidden inside the complexity. It is important that students SHOULD NOT be discouraged from studying economics, EVEN THOUGH it is completely false. This economic theory is the common religion of mankind, and is the driver of policies all over the world today. So we must UNDERSTAND it, in order to be able to oppose it. This is the most important intellectual battle we face today. To stop studying economics means to abandon the battlefield and run away. Instead we must learn deeply the thoughts which shape the minds of nearly all of humanity today. But we need to change the WAY we study. Study economics NOT as the TRUTH from the WEST, but as a WEAPON which is being used against us. See An Islamic Revolution in Social Sciences
End of Part II of the Talk about an Islamic Approach to Economics. Part 1:Applying Islamic Teachings to Economics provides the first part in English and also a link to the original one hour talk in Urdu.
The previous post on “Economics: Reform or Revolution” was about a long-running debate, both within mainstream economics, and with Islamic economics — do current theories need modification (reform), or should they be thrown out, in order to create a fresh beginning on different (islamic) foundations (revolution)? The past issue of JKAU: Islamic Economics contains a discussion of this question organized around a set of questions which all of the participants in the discussion had to answer. The first question was about the “Relevance of Economics to Real World Problems?”. If we look at the massive economic problems all around us — misery of billions of people, combined with increasing wealth and inequality, looming climate catastrophe due to search for corporate profits make by killing the planet, and so many others – it is clear that economic theory paints a wildly distorted picture of reality, and is actually RESPONSIBLE for the misery that we see around us. See ET1%: Blindfolds Created By Economic Theory for more details about this. The previous post was about the answer to this first question, and says that Economic Theory is not just not relevant to the solution, it is ACTUALLY THE MAIN PROBLEM, because it deceives us into trying to solve the WRONG problems, and waste our energies on fighting phantoms, while blinding to the real problems. For more explanation of HOW Economic theory creates illusions to deceive us, see: “A Thousand Snakes: Image and Reality of Western Economcis “. This post is about the 2nd in the list of questions put to the participants in the JKAU Discussion Paper about “Reform of Economics”.
QUESTION TWO: How far and ‘genuine’ have been such calls for reform? Have they ‘really’ departed from the core body of mainstream economics or are they still on its ‘vicinity’ with some changes in names and titles?
PRELIMINARIES: It is amazing how little has changed after the Global Financial Crisis. The same models which failed so badly continue to be used. The same macro theories which were blind to the crisis continue to be taught. This is the background for the question, which section 2 of my discussion paper entitled “Launching an Islamic Revolution in Economics” answers as follows:
SECTION 2: As discussed in the answer to the previous question, “reform” is the wrong word to use in context of power/knowledge. Economic theory is an instrument of power, and to try to “reform” is to engage in a power struggle on behalf of the billions living in poverty today. The traditional economic diagnosis of “scarcity” says that to eliminate poverty, we must get MORE goods, in order to be able to provide for the poor (see: The Illusion of Scarcity). The fact of the matter is that the goods currently available are hundreds of times more than what is required to satisfy basic needs of everyone on the planet. So, the central problem of economics is one of “Re-Distribution”. How can we get the excess wealth of the rich – which they will never use for their own consumption – into the hands of the poor? Of course, this way of looking at the matter is exceedingly harmful to the interests of the rich and powerful, and so economic theory avoids discussions on inequality and re-distribution to the extent possible. For instance, a Nobel Laureate advocate of the free market, Robert Lucas, said that “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution”.
So, when we talk about reform, we really need to discuss strategy – how can we prevail in a political battle against the rich and the powerful, who control the media, and are major donors to universities? The power/knowledge thesis works in both directions. Just as possession of power allows control of the flow of knowledge, so access to knowledge creates the power to bring about meaningful changes. The knowledge provided by Allah T’aala – who gave man knowledge that he did not have – catapulted ignorant and backwards Arabs to world leadership. Today, Islam provides with this same powerful knowledge, which has the potential to launch a revolution in all domains of social sciences, including Economics. (see Islamic Knowledge: Still Revolutionary after 1440 Years!)
The power/knowledge thesis is an outgrowth of Marxist theory, which has complete clarity on the issue that to reform economic theory is to call for a revolution on behalf of the poor. The required reforms will take away surplus wealth from the rich, who have obtained this by exploiting labor, and other planetary resources. This excess will be given to the poor laboring class, as well as all who are in need of it. The strategy of the Marxists is to call for a class war of the poor against the rich: “Workers of the world unite; you have nothing to lose but your chains”. History bears witness to thousands of revolutions of the poor against the rich, with the vast majority being unsuccessful.
Islam offers a radically different approach and strategy for the same problem. It calls for a realization of the brotherhood of all human beings. It asks us to struggle to spread the good – that is, the values of cooperation and generosity. It asks those who have surplus to give to those who are in need, for the love of Allah. It also enforces a compulsory tax of 2.5% on the wealth of the rich, for the explicit purpose of aiding the poor. It asks the entire society to insist on ‘the feeding of the poor’ – that is, it creates awareness of our collective social responsibility for taking care of bottom segment of the population. All of these measures are outside the scope of conventional economics, but central to Islam. See Islam Versus Economics.
END of section 2 of paper on “Launching an Islamic Revolution in Economics“. Some additional remarks: The greatest tragedy of today is that, even though Islam offers us revolutionary solutions to modern problems, Muslims have stopped believing in these solutions. Instead, they think that the West has all the solutions, and Islam is obsolete, no longer of relevance for today. Why did this happen? The reasons are complex. The first reason is that the global conquest and colonization of the globe carried out by Europe created in our hearts and minds a “Deep-Seated Inferiority Complex“. In order to “Learn Who We Are!“, we must break the chains wrapped around our minds by our Western education, which is designed to turn us into a human resource – a robot for sale in the market for labor. We are also trained to believe in “Central Myths of Eurocentric History“. The spread of capitalism throughout the globe has also created in us the belief that the whole world is a marketplace, and “Pursuit of Wealth” is highest goal of life. All of these deeply implanted false beliefs must be UNLEARNED before we can learn to see the light of Islam. For my own journey in this path, see “From Light to Darkness“, for an essay on how a Western education blinds us to reality, and how Islamic teachings can liberate us.
An Islamic WorldView 