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.
Is economics an ideology or a science? In order to respond to this simple, but challenging question, one must understand the difference between the two: ideology and science. After having a vivid image of the two concepts and having read the following short essay, the readers would be in a position to know what the modern economics is thought to be as either ideology or science.
Ideology and Science are diametrically opposed to each other. An ideology is a set of beliefs that is maintained even in face of strong empirical evidence to the contrary. Science is primarily concerned with explaining the empirical evidence. Theories which conflict with observations are rejected. This does not mean that ideology is necessarily wrong or bad – we must maintain our belief in justice, morality, honesty, trust, integrity without any empirical evidence; indeed, even when strong empirical evidence suggests that these beliefs will not bring us popularity or personal benefits. However, ideological beliefs in wrong ideas can blind us to the facts and prevent learning which is essential to progress. Nobel Laureate Joseph Stiglitz remarked that modern Economics represents the triumph of ideology over science. This essay explains the reasons for his remarks.
Modern economic theory is founded on axioms for rational behavior, which is equated with selfish behavior by economists. No empirical evidence is presented for this axiom; rather it is taken to be self-evident. In the 1980’s some psychologists, perplexed by the economic theories of human behavior, decided to test these theories via some experiments. Amazingly, nearly all experiments conducted showed human behavior to be strongly in conflict with the economic axioms. A widely replicated experiment is called “The Prisoner’s Dilemma”. This game is similar to many real life situations, where an individual can benefit by betraying a social agreement, as long as other parties stick to the agreement. However, if all people betray the agreement, then everybody loses. Economic theory predicts that selfish individuals will betray agreements, and social conventions of cooperation will break down. However, real life experiments show that cooperation and maintenance of social conventions, even with complete strangers, is quite common. Generally, economic theory assumes that selfish motives dominate all others. However, real life behavior in experiments displays a large variety of motivations, based on reciprocity, trust, generosity, charity, morality, and other motives which are assumed absent in economic theories.
For a very long time, economists refused to take results from experiments seriously, because these were in direct conflict with axioms at the heart of economic theories. The empirical failure of economic axioms led to the creation of “Behavioral Economics,” which studies actual behavior of human being. In any scientific field, “behavioral economics” would be the center of attention, since it matches the observational evidence about human behavior. Furthermore, the axiomatic theory, which is contradicted by the empirical evidence, would be a long forgotten idea belonging to the primitive history of economic science. Surprisingly, mainstream economic textbooks, used all over the planet, continue to teach axiomatic theories of human behavior as if they are true, while behavioral economics remains neglected and ignored.
Why do economists maintain an ideological commitment to patently false theories of human behavior? Certainly it is not because these theories are noble and elevating. In fact, many observers have argued that these theories create immoral behavior, by teaching that selfishness, without concern for morality or society, is rational for everyone, and good for society. For example, Nobel Laureate Milton Friedman taught that businesses should maximize profits, without any concern for social responsibility. Given this license, multinational corporations have gone on a rampage, exploiting natural resources by using methods which threaten to destroy the planet. The easiest way to make a profit is to appropriate a priceless natural treasure, like a rainforest, and chop it down for timber. The losses from industrial wastes are changing the composition of the atmosphere, oceans, lakes and rivers, and inflicting costs on all human beings, but creating profits for corporate coffers. This strategy is called ‘socializing the losses and privatizing the gains.’ With massive profits, it is easy to buy politicians to prevent environmental concerns from getting in the way. The book Merchants of Doubt documents a well funded campaign to create doubt about climate change, so that corporations can continue to make profits while destroying the planet. The persistence of economic theories which celebrate and glorify these poisonous ideologies of personal greed and social irresponsibility can be traced to corporate funding of think-tanks and research which promote “free markets”. The charms of “freedom” propagated by economic ideologies conceal the ugly reality of corporate freedom and wage slavery of the masses.
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?
Everyone of us is interested to know more about money. We want to explore how it is perceived by public, how it is taken care of by the government and also how the economists think of it and its role in the economic system. The question of money knowledge becomes even more interesting when it comes about the fiat or paper money that is printed and issued by the government or the state decree. If you are interested to widen your understanding in this respect, you are on the right page. Dr. Asad Zaman has written the article to enhance the public awareness on the subject that is for you to understand in the subsequent lines.
While money and banking plays an extremely important role in the economy, economics textbooks teach the opposite. According to the quantity theory of money (QTM), money plays no role in the economy at all; it is a veil which covers the workings of the real economy. An increase or decrease in the money supply will cause an increase or decrease in the prices, and will have no long run real effects on the economy. According to QTM money is neutral: we must look beyond the veil of money to understand how the economy functions.
The truth is that the standard theories of money and banking are themselves a veil which covers the reality of how the system works. This veil was penetrated briefly following the Great Depression of 1929, which was completely incomprehensible according to standard economic theories of the time. To explain the Great Depression, Keynes invented a new economics, in which money was not neutral. He argued that shortages of money would lead to unemployment and recessions, while excess would lead to inflation. At the same time, leading economists such as Irving Fisher, Frank Knight, Simon Schultz and many others realized the crucial role played by excessive credit creation by banks in precipitating the Great Depression. In 1933, they came up with the Chicago Plan which takes away the power to create money from the banks and gives it back to the government. The Banking Act of 1935 created deposit insurance and many other regulatory measures to control banking, but did not implement the Chicago Plan. Keynesian insights about money and Chicago insights about banking were gradually forgotten. The eerie resemblance of the Global Financial Crisis of 2007 to the Great Depression led two IMF economists to dust off the bookshelves of history and re-visit the Chicago Plan. Since then, it has been gathering momentum in terms of public awareness, but has been mostly invisible in the dominant media and politics which are controlled by big finance. However, the Iceland Government recently published a report which proposed a variant of the Chicago Plan. Most recently, on 1st December 2015, the Swiss public created a successful petition with 112,000 signatures to ensure parliamentary hearing on the proposal for Sovereign Money, which is a core element of the revised Chicago Plan. Since powerful interests have been blocking and opposing the Chicago Plan, it is up to the public to learn about the issues and create a movement for change. In this connection, interested readers may look up “Corrupt Banking System explained by twelve year old” on internet for an entertaining and informative detailed video of explanation. We provide a very brief explanation of the central issues below.
In the fractional reserve banking system, banks are only required to keep a small fraction of cash against the demand deposits outstanding against them. For example, in order to create grant a loan of 10,000,000 to Mr X, Mozoon bank only needs 5% of the amount, only 500,000 in the form of cash deposits. The bank grants the loan simply by creating an electronic entry in its accounts. In advanced economies, money travels electronically between financial institutions, and cash reserves are little needed. When necessary, they can be borrowed from many sources; especially the Central Bank is under obligation to cover cash shortfalls of banks. At 10% interest on the loan, Mozoon Bank will make a cool profit of 1,000,000 based on its meagre cash reserves of only 500,000. Where did this profit come from? It came from the money created out of thin air by Mozoon Bank and then lent out to the borrower at 10% interest. Because Pakistan is financially primitive, banks keep larger reserves (nearly 30%) and cannot leverage their cash deposits to the extent possible in more advanced economies.
The conventional wisdom, taught in textbooks of monetary economics, is that the government creates money, not banks. Furthermore, banks are financial intermediaries: they lend money which they gather as deposits. The reality is that the banks invent the money that they lend. This means that the banks, and not the government, are in control of the money supply in the economy. Bank creation of money acts in ways that are opposite to Keynesian prescriptions, and de-stabilize the economy. According to Keynes, when the economy is in a recession, the government should expand the money supply. In a booming economy with full employment, the government should cut back on money supply to prevent inflation. However, banks lend less in recessions, reducing the money supply. They lend more in a booming economy, adding to inflationary forces. Following the Global Financial Crisis, theories of Hyman Minsky called the Financial Fragility Hypothesis have become very popular. Minsky adds details to this crude picture, and show that banks systematically de-stabilize economies, leading to crises and crashes. The empirical record showing more than 200 banking crises over the past thirty years bears out the theories of Minsky. The Global Financial Crisis, like most others, was caused by excess money creation by banks, which fueled the fires of speculation, leading to a crash.
The solution to this problem is the proposal for Sovereign Money which has been detailed in the Iceland Plan, and will now be up for discussion in the Swiss Parliament. Instead of fractional reserve, banks must keep 100% reserves, preventing them from creating money. Instead the Central Banks will create money in the right quantity designed to stabilize the economy according to the Keynesian prescriptions. IMF economists Benes and Kumhoff have shown that this radical reform of money and banking will bring multiple benefits. It will eliminate banking crises, increase growth, eliminate debt, and create more fiscal space for development projects. It will also decrease the massive inequality which allows a tiny minority to control the political and economic system. The present system enslaves the majority in chains of debt only because a large number of deceptive claims about its benefits are widely believed. If we learn the truth, it can set us free.
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:
I have always wondered I am unable to see demonstration of knowledge being a tool to give us power. putting it in simple words, that if something is true, it must be evident to everyone else as an object and need not be interpreted and it must not have different meaning for any one else. But this is not how things work out there in the real world. For instance, if everyone agreed that when the sun is out there, it would be called “NIGHT” and when the moon spreads out its light we would call it a bright “DAY”, Then? definitely it would by the rule of the day. But how it would happen? What is needed to do so? If there is a supreme body with absolute power, that may announce it, it would surely be admitted at once. So the question is, does knowledge give birth to power or the power is a source of knowledge? On similar notes, it may be called that the power is the source which shapes the knowledge.
We cannot understand the world around us without a sophisticated understanding of the complex but intimate relationship between knowledge and power. One of the most influential philosophers of the twentieth century, Michel Foucault, crafted a radically different understanding of this relationship. Instead of seeing power in brute force, he saw power as being the ability to shape knowledge. To understand Foucault, we must let go of our comfortable and conventional understanding of Truth as an objective and factual entity which exists outside time and history, and which cannot be manipulated by ordinary mortals. Instead, we must learn to see Truth as a social product, which is created and shaped by politics and power. As Foucault said, “My job is making windows, where there were once walls.” Absorbing Foucauldian insights opens windows onto entirely new ways of seeing the world. This is demonstrated by Michel Foucault in his work “Power and Knowledge”. The core objective of his work is reflected in the following passage.
Instead of the simplistic binary understanding of ideas — as being either true or false — Foucault offers us a dramatically different perspective: “We have to be there at the birth of ideas, the bursting outward of their force: not in books expressing them, but in events manifesting this force, in struggles carried on around ideas, for or against them.” The concept of Power/Knowledge is best understood by illustrating how it is used with concrete and specific examples.
Consider the question of how we can achieve good governance in Pakistan. Using the orthodox and conventional understanding of knowledge, we would take it for granted that “good governance” is desirable, and the discussion would be confined to current failings in this dimension, and measures we could take to improve governance. However, someone who has absorbed Foucault’s message about the Power-Knowledge nexus would approach this question differently. Instead of being trapped by the framework created by the question, we can turn the tables by asking why this question is under discussion. Foucault invites us to study the “archaeology of knowledge”: search the historical archives to ask about the birth of the idea. Doing so, we find that the question gained prominence in global discourse only after the 1989 World Bank (WB) report: Sub-Saharan Africa: From Crisis to Sustainable Growth. The report announces the discovery of a fundamental flaw in the prevailing development paradigm, and states the need for “not just less government, but better government.” We must dig into history to find out why the need arose for this about-face, which contradicts several precepts of neo-liberal thought. Among the established precepts of free market thought is the idea that governments are inherently corrupt and inefficient, and so privatisation is always a good policy. The idea that good governance is possible, and indeed, necessary, contradicts this; if good governance is possible, then there can be well-governed, productive and efficient public enterprises. Similarly, free market thought asserts that private enterprise is the key to rapid growth, and the best a government can do is to keep out of the way. But now we are saying that good governance is required for development. Once this is admitted, the door is open to understanding that free markets by themselves do not suffice, and that governments play a crucial role in development.
What desperation made it necessary for the World Bank, guardian of the temple of free-market thought, to admit this wild horse into the premises? Digging deeper into the historical archives, we find that Structural Adjustment Programs (SAPs), enforced all over the globe by the WB & the IMF, had become immensely unpopular. As just one among many witnesses to their failure, a senior adviser to the WB, William Easterly, described the WB as “a bloated, unaccountable foreign aid bureaucracy out of touch with sound economics that is running amok.” Among the thousands of tragedies, great and small, created by the SAPs all over the world, David Graeber mentions his experience on the island of Madagascar. Forcibly imposed austerity led the government to shut down an effective and essential anti-Malaria programme, leading to the death of 10,000 citizens. Many researchers, both inside and outside the WB, produced compelling evidence that by demanding reductions in government spending on social welfare, the SAPs were a major cause of poverty all over the globe.
It became essential for the WB to find a scapegoat, some other factor to blame for the failure of the SAPs. Thus, following its launch in the 1989 report, a virtual avalanche of reports from a wide variety of global organisations started to focus on governance, democracy, institutions and other ideal forms. The official story line became that SAPs were well-designed policies which would have worked wonders IF the governments had been less corrupt, and a strong institutional framework to implement policies had existed. This campaign was highly successful in shifting the blame from the WB onto the governments which had been forced to implement WB policies. No one asked the obvious question about why the WB took several decades to realise that the SAPs would work only in a Utopian world with perfect democracies and efficient institutions, where they would be unnecessary. Instead, developing economies all over the world accepted their guilt, and began soul-searching conferences to improve governance and eliminate corruption. The East Asian Crisis in 1997 saw an instant replay of this successful strategy. While the crisis was obviously and directly caused by enforced financial liberalisation, post-crisis the blame was shifted to corruption in the form of “crony capitalism” and many other weaknesses supposedly specific to East Asian economies.
This analysis of governance is meant to illustrate the Foucauldian method, not to argue that we should ignore governance. We must distinguish between the “narrow” and “broad” interpretations of governance. No one could object to the narrow version, focusing on improving efficiency of public administration and building good institutions. But the broader interpretation uses ideal forms of democracy, human rights, social development, and other intangibles to create impossible goals which must be met as a pre-requisite for development. We would be well advised to ignore this counsel of despair, and to set our own agenda and priorities, focusing on realistic targets suitable for our particular circumstances.