This is part 2 of a talk on The Foundations of Islamic Economics. The first part was Unlearning Economics, a necessary preliminary to learning IE

RECAP of first part of talk: The Islamization of the economy is a natural and intuitive process. Modern economic theory is the religion of capitalist societies, which replaced Christianity in Europe. This theory actively prevents individuals from understanding the real issues facing the economy and finding solutions. Therefore, it is necessary to unlearn economics in order to learn how to Islamize the economy.

In Part 2, we will discuss some of the conceptual obstacles to IE and how to overcome them. It is important to remember that the obstacles we face today are far less than the obstacles faced by Prophet Mohammad, who was able to transform ignorant and backward Bedouins into world leaders. The final message of God to humanity is complete and perfect guidance for all times and is just as revolutionary today as it was 14 centuries ago.

The central obstacle we face is the colonized mind. Western education teaches us that the most valuable knowledge was produced by the West over the past three centuries in fields such as physics, chemistry, biology, political science, economics, and mathematics. This idea is automatically created by Western education, which teaches only these subjects, and makes no mention of the Quran. To decolonize minds, we must recognize that the most important knowledge was given by God to humanity 14 centuries ago. Part of this knowledge also tells us how to conduct our economic affairs. Because Islam defines knowledge differently, the substance and method of an Islamic education differs radically from Western education. See (beta-test) free online course: Principles of Islamic Education.

A Western education is rooted in rejection of Christianity, and denial of God and Judgment Day. Thus, Economics teaches that the goal of life is to maximize pleasure in this life. In stark contrast, Islam teaches us that real success is on the Day of Judgment. Economic theory states that society should try to maximize GNP per capita, while Islam teaches that the life of this world is the pursuit of an illusion and that Allah T’aala created us to see who can do the best of deeds. Differing goals lead to great differences in social organization, reflected in economic institutions. For some of the key differences see CIE5 The Revolutionary Islamic Alternative

Whereas capitalism makes wealth the goal of life, Islam teaches us to use wealth for spiritual progress. This requires simultaneous efforts on two fronts: the nights for engagement with God, and the days for engagement with the world (as shown by Surah Muzammil). The point is the spiritual progress is achieved by struggling to implement the order of God in the world, not just by meditation in isolation. See Islam’s Gift: An Economy of Spiritual Progress

A secular society is built on the idea that individual goals clash, making collective action at local level impossible. The government is the only source of collective action. In Islam, communities are the building blocks of society – meso-economics, not micro or macro. Creating strong communities is a key aspect of the Islamization of the economy. Families are building blocks for communities. Hollywood spreads powerful propaganda prioritizing personal pleasure over social responsibility.We need to protect families and communities from these acids of modernity. On the financial side, community banks can play an important role in strengthening communities. Models are available in Germany. models and the first Islamic bank in Egypt, Mit Ghamr, play a central role in providing credit to worthwhile investments in the future, which is very different from the role of banks in financial capitalism.

One of the greatest obstacles to creating an Islamic Economy is the concept of the “Nation”. This was invented in Europe after the dissolution of the concept of a united society. It is an “Imagined community” which unites and separates. It is the greatest of the new Gods created by mankind, which has caused enormous amounts of bloodshed, unparalleled in history. In contrast, the concept of Ummah, or the Muslim community, embraces all of humanity, while assigning a special role to the Muslims. Building an Islamic Economy requires us to think beyond national boundaries, to the needs of the Ummah as a whole. Since this Ummah has been created for the benefit of mankind, we must also take up this role, of serving the creation of God. This requires thinking beyond an economics and a “trade theory” which puts nations into economic competition with each other. Wael Hallaq’s book on the Impossible State shows clearly how the very concept of a nation-state is in conflict with Islamic ideals, and how we must learn to think beyond it, for an Islamic Revival.

End of Part 2. See Part 3: The Impossible State: Handle With Care

{bit.ly/AZuec} ZOOM lecture organized by the Rhetoric on Sunday 15th Jan 2023 entitled “Foundations of Islamic Economics”. This is part 1 “Unlearning Economics”, which is required as a first step to building Islamic Economics. An immediately available unedited video is linked below; it will be replaced by an edited version later. An outline of issues discussed in the talk follows the video.

DISINFORMATION: The greatest obstacle to creating an Islamic Economy is “disinformation” – false ideas about the economy we have been trained to believe. Why is there so much disinformation? Because it serves the interest of the powerful.

Justifying Capitalism: Laborers are heavily exploited in a capitalist economy. But economic theory teaches the opposite: Both laborers and capitalists receive fair payments for their inputs into the production process. Economic theory makes a moral argument, BUT it is concealed with mathematics and technicalities, and an assertion that this is a value neutral, objective, and uncontestable statement about the real world. The argument can be attacked on technical grounds and also using moral philosophy. The post “Understanding Macro: The Great Depression” explains how economists have held on to the theory despite huge amounts of empirical evidence against it. The reason for this stubborn persistence of false theory is that this Economic Theory justifies earnings of capitalists and laborers, and defends capitalism from the accusation of exploiting labor.

Monetary Illusions: Similarly, the theory of money, as taught in economics textbooks, is full of falsehoods. Central questions like the role of money in an economy, how money is created, who benefits from the creation of money, what is the role of banks and the central bank, how does fiat money work, how it is different from the gold standard – and a whole host of others – are never asked, or else, are given false and misleading answers. For some of the details, see “The Battle for the Control of Money“. Again, the reason for these myths and confusions is that they serve the interests of the wealthy financiers, as explained in greater detail below.

Role of Banks: Banks are able to create money at will, and this gives them enormous amounts of power. However, this power depends on government (and hence public) support. Concealing this power makes it much easier to get this support, disguised as a means of creating a stable financial system. Abuse of this power, excessive creation of money, led to the Great Depression of 1929. In response, a whole set of laws (including Glass-Steagall act) was passed to strictly regulate banks, which prevented banking crises for 50 years. This regulation brought prosperity to the masses, but reduced the wealth share of the financiers. The financiers counter-attacked by creating a false, ideology-based, free market theory, and implementing it via the Reagan-Thatcher revolution. This theory continues to be taught around the world, even though it is strongly in conflict with empirical realities, because it serves the interests of power.

Unlearning: To recapitulate, an Islamic Economy functions on simple, intuitive, easy to understand principles. HOWEVER, because we have absorbed a huge amount of disinformation via an education which protects the interests of the powerful, we have difficulty understanding these simple ideas. So, the first step towards an Islamic Economy involves UNLEARNING a large number of myths we have accepted as truths. We focus on a few of the central myths below.

Social Science as Religion: The central myth is that of Social “Science”. This consists of lessons derived from European historical experience about how to structure society. The use of the word “science” makes the false claim that these lessons are universal – they apply to all societies. Also, the term science borrows the prestige of the Physical Sciences. The amazing achievements of the physical sciences impact our daily lives, and cannot be denied. But what are the achievements of “social science”? Families are the greatest source of happiness, and these have broken down in the West. Majority of children do not experience the love, comfort, and security of a two-parent family. This results in enormous numbers of social problems; as an illustration, a Minister of Loneliness was appointed in the UK recently. The planet is on verge of a climate catastrophe due to unrestrained pursuit of profits taught by social sciences.

Toxic Moral Foundations: Instead of “science”, it is better to think of Social Science as the religion which replaced Christianity in Europe. This religion rejects God, Afterlife, Judgement, and focuses exclusively on maximization of pleasure, power, and profits in this world. Since there is no God, man is just an animal in a jungle of cut-throat competition, with survival of the fittest as the only moral principle. Obviously, these moral foundations are directly opposed to Islamic ideals.

Failure of Economics: Just 4 years before the Global Financial Crisis (GFC), Robert Lucas confidently proclaimed that economists have solved the problem of preventing depressions. Milton Friedman had argued that the Great Depression was cause by an under-supply of money. Ben Bernanke, at the head Federal Reserve, increased money supply astronomically (via Quantitative Easing). This could not prevent the Great Recession which followed the GFC. Economists remain clueless about the causes of financial crises. Worse, the models in use before the crisis continue to be used to make policy today. Why do economists stick so stubbornly to failed theories?

Deeper Causes for Failed Economic Theories: Application of Keynesian Economics achieved full employment and prosperity for the masses. But, this reduced Wealth share of top 1% for 50 Years. A Counter-Revolution was plotted, and  executed implemented in the Reagan-Thatcher era. Keynesian economics was rejected, and Chicago School free market economics was created, which continues to dominate the profession. For details, see the book Naomi Klein: Shock Doctrine or the blog post: Keynesian Revolution and Monetarist Counter-Revolution. The lesson here is that Economic Theory is a concealed moral argument, designed to justify and glorify capitalism. Economic theory teaches students to maximize pleasure in this world, and to sell themselves on the labor market for money. The real puzzle is why Muslim teachers teach these moral philosophies, clearly contrary to Islam, to Muslim students?

Colonization is Conquest of Minds: Colonization requires consent of the colonized. A handful of Englishmen cannot rule over millions of Indians without their consent. Consent is created by Education: Macaulay’s minute on Education explicitly sets out the goals of Education to create a class which will respect and admire West, and have contempt for their culture, religion, and history. This education created the subordinate ruling classes – bureaucrats and army – loyal to the English. This education continues today and has the SAME PURPOSE! The English are long gone, but the coconut class which rules in their place continues to speak English, and denies access to wealth and power to the natives who do not. For a deeper discussion of how colonial mindsets continue to block progress in Pakistan, see Impact of Colonial Heritage on Pakistan

A Uniting Narrative: The vision and ideals of elite ruling class, the language they use, and their lifestyles – are RADICALLY different from that of the masses. just like the colonial period. It is necessary to have a UNITING narrative, to allow us collectively work for common goals, to progress. China was united by Mao’s vision, which called the nation to their ancient and glorious heritage. Malaysia’s ethnic groups conflicts were resolved by Mahathir to create progress. But, the effects of Divide-And-Rule continue to divide Muslims, and prevent progress.

End of Part 1:

Summary and Recap: Steps for Islamization of Economy are natural and intuitive. Modern Economic Theory is the religion of capitalist societies – it was the replacement for Christianity in Europe. It actively prevents understanding the real issues facing the economy, and thereby prevents solutions. UNLEARNING economics is necessary, BEFORE we can learn how to Islamize the economy.

{bit.ly/IEPC1C} This is the third and final discussion of Chapter 1 of Islamic Economics: Polar Opposite of Capitalist Economics. In this portion, I explain how the failed philosophy of logical positivism shaped modern economics, building it on foundations incompatible with Islam.

Over a century of religious wars made it clear to European intellectuals that Christianity was not a viable basis for building society. Rejection of Christianity was a traumatic event: everything everyone had believed turned out to be false. Theories of knowledge were developed to avoid this mistake in the future. Henceforth, knowledge would be based purely of observations and logic, and not influenced by intuitions of the heart, or subjective experiences.  

The philosophy of Logical Positivism emerged in the 20^th Century to prove that science was the only valid source of knowledge, and all other kinds of knowledge were mere superstitions. A primary tenet of this philosophy was that unobservables (like God, Judgment, Afterlife) could not be part of human knowledge. However, this view conflicts directly with the teachings of the Quran, which stresses the importance of belief in the unseen and the existence of hidden mechanisms.

The consequences of this positivist perspective can be seen in the development of the social sciences, which were built on a triple mistake: a misunderstanding of science and the scientific method, the application of this misunderstanding to the construction of the social sciences, and the assumption that the scientific method could be applied to the humanities.

In the 1960s, philosophers rejected the principles of logical positivism, recognizing that unobservables were a necessary component of human knowledge. This had significant implications for the discipline of economics.  Concepts of central importance to economics – like human welfare, happiness, emotions, and motivation – are not observable. Modern economics rejected these as unscientific, resulting in impoverished views of human economic life.

The positivist view is that economics is a value-free, objective science, governed by universal laws similar to those of physics. However, the reality is that the discipline is built on the underlying moral foundations of greed, competition, individualism, and hedonism. These values are in direct conflict with Islamic values, which prioritize generosity, cooperation, social responsibility, and striving for success in the afterlife.

Global colonization spread Eurocentric worldviews and corresponding capitalist economic systems throughout the world. Even though the colonies were liberated in the mid 20^th Century, Eurocentric worldviews continue to be the basis of a Western education, and have become even stronger. Deceived by claims of objectivity and value-neutrality, and impressed by the achievements of the physical sciences, many Muslims have attempted to build Islamic Economics on top of Capitalist foundations. This has resulted in failure because the moral foundations of capitalism are not compatible with Islam – see the Crisis in Islamic Economics for more details. This book explains the opposition between Islamic Economics and Capitalism, and how we can build the discipline on moral foundations of Islam.

This concludes discussion of Chapter 1 of Islamic Economics: Polar Opposite of Capitalist Economics: Download from: http://bit.ly/IEPCch1

The three part discussions can be accessed from:

• Ch 1 part A: http://bit.ly/IEPC1A
• Ch 1 part B: http://bit.ly/IEPC1B
• Ch 1 part C: http://bit.ly/IEPC1C
• Preface: http://bit.ly/IEPC01

{bit.ly/IEPC1B} Continues from previous post on Chapter 1 of Islamic Economics: The Polar Opposite of Capitalist Economics. Studying the archaeology of knowledge – how the discipline of economics emerged – yields precious insights into the nature of the subject.

The religious wars that ravaged Europe for over a century caused enormous loss of life, leaving a profound impact on the lives of the entire population. It was clear to all that religion could not serve as a basis for organizing society. Christianity became confined to a personal belief system, and the scholastics approach to economics and politics was abandoned. European intellectuals came to believe that the natural state for humanity was “war of all against all”, and political science had to be devised to prevent this.  

The rejection of Christianity had a profound impact on the development of social sciences in the West. The need to create consensus across warring factions led to an emphasis on objectivity and rationality in the creation of secular social sciences.  Since differing moral judgments had divided Christians, moral foundations of these new sciences were concealed within the concept of “rationality”. This concealment of morality within rationality had far-reaching consequences, which will be described in greater detail later. In particular, Muslims were deceived into accepting these secular sciences as objective and rational descriptions, instead of normative frameworks which presented European society as the ideal for all mankind.

To overcome this deception, it is useful to think of Social Science as the religion which replaced Christianity in Europe. The idea of society as a single body, in pursuit of common goals, was replaced by the idea of society as consisting of warring factions with no common goals. This led to the emergence of “freedom” and “wealth” as goals of social organization. Neither of these is desirable for its own sake – freedom is valuable as freedom to do what one desires, and wealth is valuable as a means to obtain desirable goods or services. However, in a secular society, consensus on goals is not possible, and allowing everyone the means – freedom and wealth – to pursue their own goals is the only uniting principle. Whereas all other societies put social responsibilities above individual freedom, European societies reversed these priorities and emphasized individualism, because the sense of a common society was lost.

Social sciences were built on these Eurocentric ideas, shaped by historical experiences of Europe. These sciences were spread globally through colonization, shaping modern societies around the world in the image of Europe. Post-modern Western thought has recognized the inherently Eurocentric nature of social science, but the dominant perspective remains highly Eurocentric, particularly in Western sources of knowledge like Wikipedia. The question arises: why social science claims to be universally applicable, given that it is obviously based on lessons extracted from European historical experience? The answer, detailed in Edward Said’s Orientalism, is that global conquest and colonization created a superiority complex in Europeans. They thought that they were the most advanced society on the planet, and all others would come to resemble Europe as they progressed and developed. Economic theory has also been strongly shaped by the rejection of Christianity. It interprets “rationality” as maximization of pleasure and profits, which is valid only if there is no God, Judgment, and afterlife.  

Unfortunately, many Muslims have been taken in by this “rationality” claim, and uncritically accepted modern economic theories. This has led to the treatment of Islamic Economics as a variant of capitalism. The teachings of Islam launched a revolution in history, transforming ignorant and backward Bedouin into world leaders. Islamic principles of social organization were implemented globally in Islamic societies for over a thousand years before being destroyed by colonization. To rebuild society according to these principles, it is necessary to reject capitalist mindsets and worldviews and rebuild according to the frameworks of the Qur’an and Sunnah. A sketch of how this can be done will be provided in this book (Islamic Economics: The Polar Opposite of Capitalist Economics).

Links:

1. Join weekly mailing list for free online course on Islamic Economics: http://bit.ly/AZIEML
2. Origins of Western Social Sciences: Detailed Discussion: http://bit.ly/IR3owss
3. The Puzzle of Western Social Science: http://bit.ly/AZpss
4. The Grand Deception: Western Social Science: http://bit.ly/AZgdss1
5. Empirical Evidence Against Utility Theory: http://bit.do/azultima
6. Models & Reality: How Did Model Divorced from Reality become Acceptable? The WHY of crazy models: http://bit.ly/WEAwhy
7. Writeup of THIS video: http://bit.ly/IEPC1B

{bit.ly/IEPC02} The teachings of Islam transformed ignorant and backward Bedouin into world leaders, and launched a civilization which dazzled the world for more than a thousand years. These teachings have the same power today. Islamic Economics is a branch of these teachings which tell us about how to organize economic affairs of a society. These teachings are radically different from those of Capitalism, the economic system which dominates the world today. A free online course “A New Approach to Islamic Economics” will be offered starting Sunday Feb 5th 2023 – details will be sent to members of my mailing list at http://bit.ly/AZIEML – As background for this course, my paper entitled “The Crisis in Islamic Economics”, has been summarized in a sequence of seven posts listed below. The five minute video provides an introduction to our new approach:

CIE1: The Islamization of Knowledge: Our minds are shaped by the education we receive. Because of global dominance of the West, today we all receive educations designed to glorify the achievements of the Western Civilizations, and to nullify the achievements of all other civilizations. As a result, we are educated to believe that the only knowledge of value is that which has been produced by the West in the past three centuries.  Since we look to the West for guidance, we cannot benefit from the guidance of the Quran, which remains as revolutionary today as it was 14 centuries ago. While a Western education systematically blinds us to the truth and beauty of the guidance from God, it contains elements of knowledge essential for the modern world. The only solution to this dilemma is to recreate Western knowledge on Islamic foundations, taking what is useful and necessary, and discarding harmful elements in conflict with the final message of God to mankind. This project is called the “Islamization of Knowledge”

{bit.ly/azczie1} Part 1 of a summary of a talk at IBA on how we can create an Islamic Economy with zero-interest.

There is a glimmer of hope in creating an Islamic economy in Pakistan, as the government has withdrawn its objections to enforcing the Constitution and allowing the decision of the Federal Shariat Court (FSC) against interest to become law. However, this issue is far more complex than it appears on the surface, as both the politics and economics involved are very deceptive. Unfortunately, I do not have sufficient time to delve into all of the details and clarify all of the issues. In a nutshell, zero interest is necessary for an Islamic economy, but it is not sufficient on its own. If zero interest were to be enforced today, it would cause a huge economic crash. Zero interest should be seen as a natural outcome of a well-organized economy, both secular and Islamic. High interest rates, on the other hand, should be viewed as emergency measures that are required to handle extreme mismanagement of the economy – a band-aid for a wound. In order to reduce interest to zero, it is necessary to have good management of the economy, which can be achieved through the use of Islamic principles.

Creating social change requires a three-dimensional approach:

1. Positive: Understanding the current situation on the ground
2. Normative: Clarity of vision about desired outcomes
3. Transformative: Strategies for changing current situation to the desired outcomes.

When it comes to creating an Islamic economy, all three dimensions present great difficulties, which we will describe in greater detail. However, it is not possible to provide a complete treatment of these issues within the limited time we have.  

POSITIVE: Economic theory is designed to prevent us from understanding how the financial system works. Textbooks theories about money are dramatically wrong, and make it impossible to understand inflation. Yet, a zero-interest economy requires a zero-inflation economy. Four myths about money propagated by economics textbooks are:

1. Money is the sole cause of inflation
2. Government creation of money will cause inflation
3. Government must raise taxes or borrow money to finance its expenditures
4. Government must borrow money from domestic and foreign sources in order to function

Myth 1: Inflation is a monetary phenomenon. This is obviously false. For example, stagflation in the United States was caused by OPEC oil price hikes in 1971, and current inflation in Pakistan is largely due to high prices of energy imports. Increased money supply can sometime, but not always, create demand-pull inflation. But cost-push inflation being witnessed today has no relation to money and prices – see Why Global Inflation?

Myth 2: One of the central assertions of Keynesian Economics is that if money is spent to provide jobs, then the additional production created by use of money will offset the inflationary tendencies of money creation. See The Great Depression and Keynesian Economics.

Myth 3: Government creation of money is essential for business profits and household savings, both of which are necessary in a capitalist economy. The government is not like a household, and can create money ex nihilo (out of nothing).  Modern Monetary Theorists, the intellectual heirs of the legacy of Keynes, have provided the clearest explanation of these issues. See ABC’s of Modern Monetary Theory.

Myth 4: The Government never needs to borrow from domestic sources, because it can create money instead of borrowing it. It must borrow from foreign sources for essential imports. One cure for this problem is to achieve self-sufficiency in producing essentials. For more details, see “The Debt-Trap and Self-Reliance”. Being able to avoid foreign loans is the key to achieving sovereignty.

Meta-Analysis: Why Economists Propagate Myths?

A higher-level question to consider is why economists support monetarism, even though it is obviously false. Monetarism is a theory that states that money only affects prices and cannot create employment, and that the government should not be responsible for creating jobs. This theory was a response to Keynesian economics, which argues that free markets do not guarantee full employment and that it is the responsibility of the government to create jobs. The graph below shows that implementation of Keynesian theories in the post-war period brought prosperity to the masses, but reduced the income share of the top 1%.  

Naomi Klein’s book, “The Shock Doctrine,” highlights the role that economics plays in supporting power structures. Economic policies aligned with Keynesian theories created full employment, leading to unprecedented prosperity in USA and Europe from 1945 to 1975. The Alkire-Ritchie paper, “Winning Ideas: Lessons from Free Market Economics,” documents how the top 1% patiently plotted to reverse this trend, which had reduced their share in from a high of 24% to a low of 9%. The Reagan-Thatcher era implemented Chicago School theories, and launched a counter-revolution against Keynesian economics in the 1980s. This shift in economic policies contributed to a dramatic rise in inequality, as the share of the top 1% skyrocketed. From this analysis it is clear that free-market theories dominate today not because they are true, but because they support existing power structures and status quo. See: The Keynesian Revolution and the Monetarist Counter-Revolution.

End of Part 1 — Part 2 will discuss the strategies necessary to create a zero inflation and zero interest economy.

[bit.ly/IEPC01] In this sequence of posts, we will go over my newly launched book “Islamic Economics: The Polar Opposite of Capitalist Economics”. For later posts and additional materials, join our mailing list: http://bit.ly/AZIEML . The home page for the book provides access to all earlier emails, and related reference materials: http://bit.ly/iepoc.  This first post covers the Preface.

Introductory Remarks

Why did I write this book? Because mainstream is too heavily influenced by Western thought, while Islam has its own unique and distinctive approach.

{bit.ly/rsraCH1} Recently, I finished a set of 7 lectures based on a draft of my new textbook on “Real Statistics: A Radical Approach”. All of these lectures explained why modern statistics is built on wrong foundations – so wrong that repairs are not possible. Instead, we must abandon the entire structure developed over the past century, and rebuild the discipline on new foundations. Below, I will provide an outline, summary, and links to the chapters covered. My goal is to writeup a book based on this draft. I invite people with the relevant skill set to help him with this process of converting the rough draft into a book.

The fundamental problem lies in epistemology – the theory of knowledge – which underlies modern statistics. The discipline was created in the early twentieth century under the strong influence of logical positivism. This philosophy asserts that knowledge is only based on observations and logic. Positivism had a spectacular collapse later, when it was discovered that scientific theories make essential use of unobservables, and cannot be reduced to ideas involving observables only. The discipline of statistics (and economics) has been built on foundations of positivism. Collapse of positivism makes it necessary to rethink these foundations, and rebuild, but this has not been done. Both disciplines continue to use the same methodology which has been proven to be fatally flawed by philosophers. This book aims to explain these issues in greater detail

Very briefly, logical positivism asserts that domain of knowledge should be confined to those statements which can be verified by observations and logic. Then, who made the statement, and why he/she made it, are not relevant to the assessment of it’s validity. In Islamic epistemology, we look at the reliability of the person making the statement first, before evaluating the statement. The fundamental claim I am making appears outrageous: the entire structure of statistical theory, as it has developed over the past century, is flawed beyond repair, and must be abandoned. In accordance with Islamic epistemological principles, I thought it best to begin by explaining my life experiences which led me to these radical views. My hope is to establish credibility, before we start the discussion of statistics. Accordingly, my draft book begins with a discussion of my life-experiences which led me to the creation of this textbook. The video is not directly related, and discusses my education at MIT as a teenager, from my current perspective as a senior citizen:

Chapter 0: Life Journey:

1. Beginnings: I describe how a Western education led me to the conviction that the knowledge created by the West over the past three centuries is the most magnificent achievement of mankind. Later, my experience with Tableegh led me to the heart-certainty that the final message of God to mankind, embodied in the Quran and Sunnah, provides complete and perfect guidance for all times. I could not find any way to reconcile these two diametrically opposite ideas, creating a dramatic conflict between my head and heart.
2. Dreams: Reading Edward Said’s powerful and influential book “Orientalism”, which destroyed an entire category of thought, planted the seeds of an idea about how this conflict could be resolved. What if the entire discipline of Economics, in all its sophistication and depth, is nothing more than a projection of European power? I realized that it would take decades to explore this idea in depth, and find solid evidence. I decided to embark on this journey of a thousand miles, by taking small steps, and gathering evidence of small problems in limited subdomains. The hope was to collect sufficient ammo, bit by bit, to launch an attack on the citadel of Western knowledge.
3. Europeans Reject the Unseen: I started to find chinks in the armor of the formidable rigorous mathematical structures of economics. I learned from Paul Bairoch: Economics and World History: Myths and Paradoxes that history does not support one of the favorite ideas of economists – that free trade is good for everyone. Similarly, the foundation of microeconomics, that every person tries to maximize pleasure, does not correspond to actual behavior. Tracing these anomalies to their roots led me to the discovery that the fundamental problem was a rejection of the unobservables as a source of knowledge. In turn, this resulted from European historical experience with religious wars lasting for more than a century. This led to a rejection of religion, which was extended to a rejection of all unobservables, as a basis for knowledge.
4. The Poison of Positivism: Having rejected Christianity as a basis for knowledge, European had to search for new foundations of knowledge. The Enlightenment Project was based on the idea that the entire stock of human knowledge must be built up from observations and logic, and include only certainties, without any element of doubt. In early 20th Century, this idea became dominant in the form of logical positivism. Since only empirically demonstrable statements counted as truth, all moral statements, character building, community, compassion were ruled out of the bounds of knowledge. This had a dramatic effect on University education, which shifted from character building to purely technical education. The attempt to achieve certainty – which is impossible to achieve for fallible human beings – led to the cloaking of toxic moral foundations as self-evident truths.
5. Impact on Statistics: Logical Positivist theories of knowledge were used to build the foundations of statistics in the early 20th Century. Two critical ideas which are fundamental to statistics are unobservable. Causation refers to a hidden structure of reality such that when event E occurs then event F necessarily follows. We can observe that one event follows the other, but it is impossible to observe that this is necessarily so. That a cause which was effective in the past will continue to be effective in the future. The observables can only provide us with correlations, and modern statistics still does not have a satisfactory theory of causation. Similarly, probability concerns what might have happened. This is also unobservable. The positivist foundations of statistics have prevented the development of satisfactory treatments of probability and causality.

Money and Interest play a very important role in Islamic Economics, but there is a huge controversy about what money is – especially since the role and function of money has evolved and changed substantially over time. Curzio Giannini’s book “The Age of Central Banks” provides clarity and insight into this topic not easily available elsewhere. We will cover this book in a sequence of posts and videos. This is the first post in this sequence and covers Chapter 1, sections 1 to 3 of the book.

This material summarizes the first three sections of Chapter 1 of Curzio Giannini’s masterpiece, The Age Of Central Banks. Chapter 1 is entitled Money between state and market: the concept of payment technology. There are two view of money – as a private creation of markets to faciliate exchange, and as a creation of the government by fiat. This chapter resolves this controversy, showing how both market and state are necessary aspects of money. {ppt slides for video: bit.ly/ssGian01A }

Section 1.1: Introduction

What is Money? A bundle of contradictions. Debates about money spanning centuries. Unresolved controversies. Many different theories and schools of thought about role and function of money within an economy. Ranging from QTM: Money does not matter, to money is central to modern economy. To understand why this matter is so controversial, see “The Battle for the Control of Money“