Educational Planning at Akhuwat University

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{bit.ly/AKHEDU} It is a simple fact that the education we provide to our children shapes the future of the nation. From personal observation over twenty-five years, I can testify that our educational processes destroy the potential of our students, instead of building it. Furthermore, this problem can easily be remedied by adopting Islamic models of education, instead of mindless imitation of Western models which currently dominates the field. It is horrifying to contemplate the enormous amount of time we waste, teaching materials of zero value to the cream of our youth. But this disastrous educational methodology also means that there is enormous potential for improvement.

Meaningful discussion of educational policy must begin with recognition of the dramatic differences between the English-speaking elites and the vernacular classes. The foreign exchange spent by the elites on taking exams from England exceeds by far the government budget for primary schooling for the masses. This discussion is mainly about the non-English speaking masses, and not about the English-speaking elites. Our educational system fails the masses on all fronts. It does not prepare them for life, does not provide job skills, and does not create understanding of the forces which shape the world around us. One critical barrier is the medium of instruction, which is English. Whereas our elites speak English from early childhood, the masses never acquire proficiency in this language. This makes it impossible for them to master complex materials from an alien culture in a foreign language. Instead, rote learning of a narrowly circumscribed set of topics makes a mockery of the concept of education.

The single most important policy for the future of Pakistan would be the provision of equal educational opportunities for all the children of Pakistan. For the long-run, this would provide far greater returns than any of the standard set economic policies being touted as the solution to our current economic problems. If we could create the feeling of being united like one body, so that the whole feels the pain of any part. If we could treat all children of Pakistan as our own, this would be sufficient to change the future of the nation. I am not asking for the moon; all I would like is that, within the means available to us, we provide the best possible education to all our children, irrespective of their social class. Given the current setup, where what the elites spend on their children’s education exceeds by far the government budget for educating the masses, this seems like a pie-in-the-sky dream. But a journey of a thousand miles begins with a single step. I hope to describe the first few steps in this post, in the context of a very practical example of Akhuwat University.

It is the dreamers and the visionaries who change the destiny of nations. Pakistan is fortunate to have been blessed by many visionaries, including Dr. Amjad Saqib. He is famous globally for introducing interest-free Islamic microfinance, which was considered impossible by many. Over the past two decades, Akhuwat has made interest free loans of billions of Rupees to millions of people, and lifted countless out of poverty. As an extension of this vision, Akhuwat University was launched about four years ago, to provide completely free education to the poor. Currently, it has only BS IT, BS Econ and a Diploma in Tourism and Hospitality. It chooses students from all provinces of Pakistan, and strives to integrate them in the hostels.   

When Dr. Amjad Saqib asked me to head the Economics Department at Akhuwat, I accepted the challenge. I was confident that I could teach economics in a way that would be far superior to what is currently available in Pakistan. Having studied economics throughout my career, I have become deeply aware of the failings of the subject. For starters, modern economics was developed by Western authors for Western economies, and is blind to the economic problems facing Pakistan. So, it is easily possible to provide a far superior approach, which would give students insights into the Pakistani Economy, instead of the US Economy. I wrote up an initial plan for pedagogical changes in the BS Econ program here: Akhuwat University: A Paradigm Shift in Education.

After spending some time on campus, and meetings with students and faculty, I realized that my initial plans for revising the Economics curriculum had many defects. What I wanted to teach our students was not compatible with HEC requirements for the BS Econ degree. Furthermore, it required a lot of reading materials in English. The teachers were not available to teach this program. And the students did not have sufficient English skills as well as maturity to read the materials available. Furthermore, if by some miracle, all of these problems could be overcome, students with a highly unorthodox training in Economics would face great difficulty in a market where conventional teaching is prized. On the other hand, if we taught a conventional economics degree, it did not seem likely that our students could rise above second-rate copies of the best programs in Pakistan. Based on these considerations, I decided to drop the BS Economics program, and replace it with a BBA program, designed to make students self-sufficient after four years of Education.

To support and justify this change, I made a presentation to the Senior Management at Akhuwat University. The audio recording of the introduction by Dr. Amjad Saqib, followed by my discussion of the planned change, is given below. A brief summary of the highlights of the talk is given below. You can also access the complete audio file for the meeting.

started by noting that the faculty and staff must buy in to the vision of Dr. Amjad Saqib, to make it sustainable in the long-run. And what is the vision we need? We want to create a model for Islamic Education, which is very different from the Capitalist Educational paradigm which dominates the market and mindsets. The educational model we are all familiar with is a market transaction, where services of a teacher are purchased for teaching a specific subject to a group of students. In the Islamic paradigm, a teacher is in loco parentis, and acts as a guide, counsellor, confidante, and life-coach to the students. For more details, see Islamic Pedagogy.

We want to design education so that the students become self-sufficient after four years. They should acquire life-skills, character, awareness of their social, civic and religious responsibilities. They should be able to understand the forces which shape the world around us. They should also be able to provide for themselves, without being dependent on vagaries of the job market. This requires substantial changes in the substance and style of pedagogy.

We would like to put Character Building at the center of our curriculum. But this is now a lost art, and we need to rediscover effective methods of achieving this goal. We want to students to be service oriented, not to seek fame, status, and luxuries, for themselves. In a fascinating book, Julie Reuben (The Making of the Modern University) has documented how the mission of character building was central to education in the early 20th century, but was dropped completely by mid-century. A university education provided technical skills only, with no discussion of the higher purposes, ideals and dreams which shape our lives. As a consequence, David Halberstam has documented in his book The Brightest and Best, that the best educational institutes of USA turned out people who could engage in mass murders in Vietnam without any moral compunctions.

All over Pakistan, we see high losses in inefficiencies due to corruption. But this is because character development is simply not a part of education. If we could just one objective: create honesty and integrity in our students, that would be enough to create a revolution. But this is a big ask which required coordinated efforts on multiple fronts. At the same time, if we do not even try for it, we will never make any progress.

Since it seems impossible to achieve the desired goals from a BA Econ, it seems advisable to shift to a BBA. But our planned BBA is different from LUMS/IBA style, which aims to equip students with skills to land jobs in the corporate sector. We want to produce job-creators and not job seekers. One of the books of Dr. Amjad Saqib entitled “Successful People” describes the life histories of our indigenous business communities and their methods for doing business. These models are radically different from the ones taught at Harvard Business School, and imitated at our local universities, without any understanding of the differences in our environment. Fortunately, Dr Shahid Qureshi and associates at IBA have created an entrepreneurship program which teaches the principles of doing business in an Islamic style. This program has enjoyed huge success, and turned out thousands of successful entrepreneurs. We hope to launch our BBA program with a tentative title “Chinioti – Memon School of Business” and differentiate ourselves strongly from the general trend of BBA programs currently available. Hopefully, our new BBA program will instill our students with the confidence and capabilities to launch their own business, and become job creators instead of job seekers.

Islamic Pedagogy

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{bit.ly/4c13knZ} I’ve spent my whole life in academic institutions, first as a student then as a teacher. I taught for 15 years in the USA, 6 in turkey and 25 years in Pakistan. In this talk, I would like to draw some lessons from these life experiences. An Urdu version of the talk is: Islamic Styles of Pedagogy (urdu). The English video below is followed by a writeup. Related: see later talk: Transformative Teaching: Changing the Lives of Our Students

Our religion teaches us that each life is infinitely precious. Each individual life is potentially as valuable as the entire humanity. Our students have enormous potential, and it is our job as teachers to bring out this potential. I found that this effort to bring out the hidden potential in the students to be of immense value, and extremely fruitful. Countless books have been written on the principles of etiquette (Adab) for Islamic education, extracted from the Quran and the Hadith. I will just mention a few. Our knowledge should not give us Pride. Instead, it should make us humble. We should value our students as having more potential than ourselves and we should take care to value their time and to give them useful knowledge. The Prophet ﷺ made Dua for useful knowledge and sought protection from useless knowledge. We have a tremendous opportunity because our students, if inspired and motivated, shape the future of the world – just like the students of our Prophet ﷺ did. Whereas our religion teaches how to become the best human being that we can be, modern education is designed to suppress and destroy this potential, and turn us into human resources, interchangeable parts in the capitalist machine for the production of wealth.

Since I myself was educated in the West, I experienced and absorbed the dominant Western pedagogical models. It was long personal journey to recover from the damage done to me by this educational process (see: Recovering from a Western Education) . It is worth providing a brief summary, so that the reader can understand where I am coming from. In the 1970s, I studied at MIT and Stanford and then for 15 years I taught at top universities in the USA. I left for two reasons:

  1. my children were growing up and I didn’t want them in public schools in the USA where they would acquire American culture
  2. I felt that I was being paid for the job of educating the children of foreigners when our own children in our own countries were not educated and this was my responsibility

When a chance offer materialized, I left and spent six years (from 93 to 99) at a leading Turkish University. After that I moved back to Pakistan, and have been teaching here since. I found my experience as a teacher much more satisfying because I felt that these students are my students and their successes were my success, and their failures were also my own failure. So, I tried very hard to make sure that they would succeed. My students responded to my efforts by giving me their best performances, and many graduates are now placed in good institutions in Pakistan, and around the world.

After my return, I noted many differences that forced me to change my approach to teaching from the one I had learnt in the West. While in USA, I saw that at the top universities, the best students were highly competitive and also very confident of their skills. In Pakistan, especially in the Public Sector, I found that the students had a defeated and colonized mindset. They could not imagine that they could be the world’s best. However, in terms of raw talent, our students are just as good as anywhere around the world. Unfortunately, the imitative educational system we have is designed to destroy their capabilities – they learn to aim low like the crows, instead of claiming their birthright to fly high (See: The Way of the Eagles bit.ly/42CCjTp ). Students can only achieve according their ambitions, and it is the job of the teacher to believe in the students, and to teach them to reach for the stars (See: Reaching Beyond the Stars: bit.ly/azRBS ).  

There is another, much bigger, difference between the role of the teacher in Market societies which now dominate the world and in a traditional Society traditional Islamic society.  In a market Society a teacher is paid for his work and he does educate the students in return for his salary.  As opposed to this, in an Islamic Society the teacher is a mentor, a life-guide, a counselor, an advisor, and he acts in a parental role. He worries about the personality development of the students. But the most important job of the teacher is to create desire and enthusiasm for the pursuit of knowledge in the students. In my experience, I have found that the greatest obstacle to high achievement is lack of self-confidence in our students. The students do not even try to learn because the experience that they have had with learning is very bad. They have been trained to not try to think instead just to memorize. Trying to master alien subjects in a foreign language has proven so difficult, that they consider themselves incompetent, and incapable of learning. They cannot identify the real causes for their failure: the educational system, the subject matter, and the teacher.

Building the confidence of our students is essential if we want stellar achievements from them. This requires work on multiple fronts. One the psychological front, we need to work on decolonization of minds. Defeats and failure on every front for the past two centuries has led to a defeated mindset in the Ummah as a whole. But, in addition to building psychological confidence we also need to provide the skills to match. Creating confidence in car-driving skills, without teaching the skills, will lead to crashes. It is the teacher’s job to build this confidence, and this starts by believing in the potential of our students. If we believe that our students have the potential to change the world, they will perform to fulfill our expectations. In addition to self-confidence, we also need to rebuild the shattered confidence in our heritage religion, heritage, and culture. I also have several lectures on this topic which are linked here: How to Launch an Islamic Revival.

In order to act as a guide, a mentor, and a life-coach, we need to create a very different relationship from the one that we are accustomed to. In a market society, the teacher’s only concern is to teach a subject he has no other relationship with the student. Instead we have to become helpers and partners of the students in their quest for knowledge. We have to switch the students from striving for scores to become knowledge seekers. This is a very difficult transition because the students have been burnt in the past. The thirst for knowledge comes naturally; it is part of human nature. But, students have been frustrated by past educational experiences. Both the subject matter and the teaching style has been designed to discourage students to search for knowledge. Students have tried many times and have failed. They have acquired the false belief that we are unable to learn. To switch their mindsets, we must change our own mindset and style of teaching as well as the subject matter. We vastly underestimate our students. Instead of discussing the big problems facing our society, facing the ummah, facing the world, or facing us in our personal lives, we teach them nitty-gritty details of trivial questions which make no sense and deprive them of the excitement of learning. If we engage with them on problems which actually matter in the real world, and teach the technical stuff as part of what is needed to solve them, they would be very eager and excited and keen to learn. I have found personally that when I started this approach, it was immensely valuable for the students. The students became engaged and interested, and acquired skills. Instead of the textbook approach which builds micro skills and defers engaging with the real world, we start with a real-world problem and then develop whatever tools techniques theories we need to solve the problem. We can also address life experiences and discuss how we go about solving problems that we face in our lives. Whenever we relate something to the experience of the students either as individuals or social problems that we face as communities, they will be very eager to learn about those. For more details about how to implement this educational method in teaching economics, see “How to Motivate and Inspire Students (URDU)“

Lecturing is a very poor way to generate learning. To learn, the students must tackle the subject, must engage with it, and struggle with it. One way to do this is the inverted classroom. We assign students some reading or some materials or some video lecture and then in class we discuss it. One method that I found useful is to put up a list of questions that I plan to discuss. Put up one question on the blackboard, and ask every student to write the answer to that on their front of them in on a piece of paper. Now, exchange papers and then ask a student what is the answer that is written in front of you. Then have a discussion – “is this the correct answer?” “what is the flaw in it?” “how should we grade it?” etc. In the end all of the students acquire a much deeper knowledge not just by learning the right answer but by also learning the wrong answers and the way in which they are wrong. This is tremendously helpful for learning.

Changing the methodology for assignments and exams is also very valuable in generating learning. We can give them take-home exams. By habit, they will initially copy from each other and cheat. We have to inform them that the take-home will not be graded. Actually I need to know how well you’re doing and by looking at your answer I will know what you have learned. If you cheat and deceive me, I will be unable to help you.  Initially, students do not believe this, but eventually they come to realize it. This takes the stress out of exams. They can self- grade the exams in their own classrooms. We can randomly distribute the exams among the students, grade them together. We ask students to discuss the answers and come agreement on what is good and what is bad. This methodology for assignments and exams creates much more comfort and much more learning on the students than the stressful methodology currently in use. It also provides us with a lot more information about what the students are learning, and about the students who are good, as well as those who are having difficulties. We can create small groups of students and ask the good students to help those who are having trouble.

One questions that came up on this material was that we teachers try very hard but when it comes to midterm we find the students fail miserably. Actually this should never happen. It should never  come as a surprise to us what the students are doing on the midterm. If, at the end of every class we assess what the student has learned, we will know exactly what the students are capable of and what they are not capable of. We should be building skills in every class, and we should be evaluating our students progress in every class. If we do this, we will know exactly what the students are capable of doing, and will not have any surprises regarding their lack of learning on the midterm. This is our job as teachers and if the students fail that means that we have failed them. Instead of thinking of exams as means of evaluating our students we should think of them as means of helping the students to learn

So to summarize the job of the teachers is to inspire, to motivate, and to build skills. We have to teach the students that they can do whatever they want to do, and to teach them to reach for the stars. We have to motivate them that acquiring an education, even though it’s a struggle, and even though studying and trying to solve challenging problems can be frustrating, it is worthwhile. Knowledge is extremely valuable, and can change our lives, and change the world. But in addition to this inspiration and motivation, you also need to build skills. If we teach students confidence but don’t teach them how to perform, then performance failures will crush their confidence. So confidence and skills should be developed in parallel. That’s the job of the teacher and that’s both very difficult and very challenging and also extremely rewarding. In fact, it is the most rewarding task in the world: all the prophets were sent as teachers. As teachers, we follow the highest profession. For more details, see Principles of An Islamic Education May Allah T’aala give us the Taufeeq to fulfill our responsibities, to change the lives of our students, and through them the world, for the better.

Nominal Versus Real Models

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Modern economics uses “scientific” methodology, under the assumption that economic laws are invariant across time, space, and society. In previous posts, we saw how this leads to loss of precious insights about money gained from historical experiences (Monetary Economies: A Historical Perspective, Lessons from Monetary History: The Quality-Quantity Pendulum). In this post, we will discuss the modeling strategy we will use to derive lessons from history which extend beyond the particular historical context from which they are derived.

Models are simplified representations of reality. When considering monetary history, the factors driving changes are notably intricate. Over the 20th century, the monetary system underwent significant transformations. World War I marked the breakdown of the gold standard, followed by unsuccessful attempts at restoration. World War II further hindered restoration efforts, leading to the Bretton Woods agreement and the adoption of a gold-backed dollar standard. Nixon’s actions in 1971 severed the link between the dollar and gold, ushering in an era of floating currencies detached from commodities. Distilling broader lessons from the complexity of historical specifics necessitates a methodological approach centered on models. Models abstract from specific historical details to illuminate structures which may be widely applicable across various historical and temporal contexts.

In this text, we will be using realist models – these differ greatly from the nominalist models used in conventional textbooks of economics. The difference can be explained as follows. Our world comprises observable phenomena as well as underlying structures that produce these observations. Nominalism holds that models should focus solely on explaining observables, disregarding whether they accurately reflect hidden reality. This notion, though counterintuitive, emerged due to the belief that hidden reality is unknowable, making the pursuit of matching it futile. Instead, nominalism advocates for assessing a model’s success based on its ability to explain observed phenomena. Conversely, realist models strive to mirror the hidden reality behind observations.

Friedman’s essay on “The Methodology of Positive Economics” strongly advocates the use of nominal models. This methodological principle has been widely accepted by economists. Friedman illustrates nominal models with the example of a skilled pool player. He suggests that even if the player lacks any understanding of physics, assuming knowledge of the laws of physics can lead to accurate predictions of their shots. In essence, the player behaves as if they comprehend physics, making successful shots based on calculations, despite their ignorance of the underlying principles of physics. This is known as the “as-if” methodology, and it is the dominant approach to models in modern economics.

In contrast, realist approaches reject such assumptions. For the pool player, a realist model might study his past experiences, and his skills at different types of shots. Realism aims to understand the internal workings of hidden reality, while nominalism accepts models that predict outcomes, without concern about matching hidden reality. Friedman developed his as-if theory in response to empirical surveys which showed the most firms do not maximize profits. He argued that the assumption of profit maximization, even if it did not match the motivations of the managers of the firms, should be assessed on the basis of its ability to predict decisions about hiring and production. However, by now, this methodology has been in use for several decades, and it has led to repeated failures. A good fit to observations for a particular finite set of data is not a guarantee of the validity of a model. It can, and often does, happen by chance. For a more detailed discussion of the superiority of real models to nominal models in the context of econometrics, see “A Realist Approach to Econometrics” (bit.ly/azrae)

We will use a recently introduced modeling strategy — Agent-Based Models (ABMs) – which has not made its way into mainstream methodology. ABM models have multiple agents – laborer, producer, shopkeeper, government, etc. – each of which has their own economic decisions to make, and behavioral patterns. This strategy has become feasible because of the vastly increased computational power now available, which permits us to run simulations and compute outcomes. The foundations of modern economic methodology, established around the mid-20th century, relied on simplifying assumptions to facilitate manual computations. For example. Leading macroeconomic models have only one agent, who has perfect foresight. Why? Because computations by hand would be impossible with two or more agents. At a Congressional inquiry into the failure of economists to predict the Global Financial Crisis of 2007, Solow testified that the GFC was caused by large scale deception and fraud. Macroeconomists could not predict it because these are impossible in models with only one agent. In contrast, models with heterogenous behavior are much better at capturing the complex internal structures of modern economies, in accordance with the principle of realist models.

Using ABMs, we can capture three Keynesian insights, all of which are essential for the understanding of money, and all of which are missing from conventional textbooks:

Complexity: This technical term refers to a situation where the group behaves very differently from the individuals within the group. For example, that even though laborers and the firms which hire them may seek to lower the real wage, they can only negotiate on the nominal wage. The real wage involves the price level of the economy which is out of their control. Keynes argued that lowering nominal wages at the micro level throughout the group may end up increasing the real wage – a perfect example of complexity. This phenomenon is beyond the reach of conventional economic theory because the textbook models are oversimplified to prevent the occurrence of complexity.

Radical Uncertainty: In a model with heterogeneity, each agent has access to a limited amount of information. The economic outcomes depend on the actions of all agents, which can never be known to the agents. As a result, the agent operates in an environment where the outcomes of the decisions he takes are not predictable. Standard textbook models use intertemporal optimization, where the agent knows his future incomes, potential consumption bundles and prices. This is simply impossible in our agent-based models. Similarly, profit maximization is impossible for firms because they incur production costs in current period, but will produce and sell goods in the next period. The price at which they can sell will depend on decisions others make, and cannot be predicted. So profits are subject to radical uncertainty, and cannot be maximized.

Non-Neutrality of Money:  Once we take into account heterogeneity and uncertainty, new insights into the role of money emerge, not available in conventional textbooks. Workers save money, and firms acquire money profits, but, due to radical uncertainty, no one knows what the value of money will be in the next period. A stable value of money allows for some degree of planning, but the QQ-pendulum shows that this stability cannot be relied upon. The assumptions of full information made in conventional textbooks make money merely an accounting unit, which does not play an essential role in the economy. However, with radical uncertainty, and differential information and behavior of different agents, money plays an essential role in the economy. Workers save money as insurance against adverse outcomes in the job market, and firms save money to guard against future losses. These different motivations for holding money, and the psychological aspects which relate to public trust in the future value of money, will come to the fore in our ABM models.   

To wrap up, we have discussed two types of models – nominal and real. Nominal models dominate mainstream economics, and are judged for their ability to match observations. In contrast, Realist models are judged on whether or not they match the hidden structures of reality which produce the observations. In the next section, we will build some simple realist monetary models, and show that these produce results and yield insights outside the range of orthodox monetary models.

Links to Related Materials

  • Bit.ly/ME01  Monetary Economies: A Historical Perspective
  • Bit.ly/MONE02 Lessons from Monetary History: The Quantity-  Quality Pendulum
  • Bit.ly/MONE03 Nominal and Real (Monetary) Models
  • Bit.ly/WEAmar  Models and Reality

Lessons from Monetary History: The Quality-Quantity Pendulum

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In the previous section, we saw how economic theories changed from Classical to Keynesian to Monetarist over the course of the 20th century. These changes were driven by historical events. Taking this historical context into account deepens our understanding of economic theories. This contrasts with the conventional methodology of economic textbooks, which treats economic theories as scientific laws, which are universally applicable to all societies. In this section, we describe one of the central lessons which emerges from the study of money over the millennia.

The transition of economic theories from Classical to Keynesian to Neoclassical can be seen as a miniature illustration of the Quality-Quantity Pendulum, which is a consistent pattern relating to money observed over millennia. Modern economic theory strips theories of their historical context, depriving us of critical insights into both theories and history. Before studying the QQ Pendulum, we will pause to discuss how this defective methodology was adopted by economists.

The Battle of Methodologies: As Geoffrey Hodgson has detailed in his book entitled “How Economists Forgot History”, a challenger to the dominant historical and qualitative methodology emerged in the late 19th century. The new methodology was quantitative, mathematical, and empirical, in imitation of scientific methodology. The devastation of World War 1 destroyed the prestige of the traditional approach to social science, so that this scientific approach became the dominant methodology in economics by the 1950s.  This ahistorical approach blinds us to the fact that all social theory is developed to analyze a particular society situated in a particular historical context. Treating it as a universal scientific law, invariant across time and space, is hugely mistaken.

Lessons from History: In this section, we will discuss some insights about the nature of money, and monetary economies, derived from the study of history by Glyn Davies in “A History of Money: From Ancient Times to Modernity”. Davies writes that: “… despite the antiquity and ubiquity of money its proper management and control have eluded the rulers of most modern states partly because they have ignored the wide-ranging lessons of the past or have taken too blinkered and narrow a view of money.” For example, Keynesians and Monetarists agree that a contraction of the money supply was the immediate cause of the Great Depression of 1929, whose ill effects persisted until the outbreak of World War 2 in 1942. From a broader perspective, a study of the history of money should have made both the nature of the depression, and the remedy, abundantly clear. Unfortunately, as the previous quote indicates, policymakers ignored the lessons history teaches us about the role of money, and made errors which caused misery to millions for decades.

Money as a Social Institution: A study of history shows that money has played a central role in shaping history across the centuries. Also, history teaches us money is not purely a transaction technology; it is deeply embedded in the social fabric of society. The use of money requires building social consensus on the trustworthiness of monetary institutions. Building this trust requires building high-quality institutions and mechanisms that guarantee the value of money in the eyes of the public. The quality of money refers to the public trust and social consensus both on the value of money, and the stability of this value across time.

High Quality Money: History provides us with an incredibly diverse set of examples of monetary institutions which provided society with trustworthy money with stable value across time. Cattle and cowries in Africa, paper money in China, Wampum in America, and Yap stones in the Pacific Islands, were used as money for centuries. Many systems even survived in competition with modern monetary systems. So, we conclude that there are a wide variety of ways to create high-quality money.

The Gold Standard: One of the ways to create high-quality money is to use gold or silver. These metals have characteristics – discussed in textbooks – that make them particularly suitable for use as money. There is very little public awareness that there are many different varieties and conflicting interpretations of what the “gold standard” means. The best reference for this is Morrison’s England’s Cross of Gold: Keynes, Churchill, and the Governance of Economic Beliefs. The strictest form of the standard – the use of actual gold – has been very rare, historically. Coins of minted gold have been far more popular. The mint certifies the quantity and quality of gold in the coin, making it far more convenient for public use.   

Minted Money and Token Money: The highest quality of money comes from minted coins, which have a value equal to the content of the metal (gold or silver). This is because the coin itself is the guarantor of its own value. There is still the question of what it is about gold and silver that creates a nearly universal consensus on their intrinsic value. Perhaps the answer is that love of gold and silver has been built into human nature, as Quran (3:14) suggests.

The numismatic evidence from buried coins shows that high quality gold coins are almost always followed by “debased” coins – coins with significantly less gold content than the face value of the coin. History tells us of the varied reasons for such debasements. Most often, the high expenses of wars require vast amounts of money, beyond the available stocks of gold. Governments resort to debasement to get more money from the same gold stock. Since gold is very valuable, even the smallest gold coins are not useful for daily transactions. So, token monies, made of copper or other cheap metals, are often used for small change. The metal value of these coins is not equivalent to their market value; instead, these coins are considered as fractions of the gold coins, and can be exchanged for them.

From Quality to Quantity: The Quality-Quantity Pendulum is a theory that illustrates the historical shifts in economic focus between the quality and quantity of money. The lesson of history, repeated across the globe, and across the centuries, is that the temptation to expand the stock of money – more quantity – proves irresistible in the long run. A modest expansion of money stock via small dilutions of gold content or small issues of token money, brings major economic benefits. Small expansions of money stock beyond gold content do not cause noticeable changes in public trust which is the central guarantor of the value of money. However, over a longer period of time, the temptation to expand the quantity beyond safe limits becomes irresistible. Events like wars, private greed, or government needs, lead to over-expansion of the money stock. An excessive quantity of money causes inflation, a loss of value, and a breakdown of public confidence in money. The drive to expand the money stock leads to a low quality of money. But large fluctuations in the value of money disrupt lives, and cause distress to all members of a monetary economy. As a result, consensus builds on monetary reforms required to create high quality money. Eventually, excess money is removed from circulation, and a high-quality money is restored, to complete the swing of the pendulum between quality and quantity.

The Pendulum of Economic Theories: Many authors have noted that history is a battle between the creditors and the debtors. In eras of high-quality money, money is scarce, and the creditors are few and powerful. They propagate pro-creditor economic theories which favor “sound” money: high quality with restricted quantity.  However, the need for expansion of money stock becomes overwhelming in many different scenarios. Then, pro-debtor economic theories emerge. These favor the expansion of the money stock, and cite numerous advantages from doing so. Creditors argue in vain against these theories and warn that they will lead to ruin. The benefits from expansion are immediate and obvious to all in the short run. But in the long run, the creditors’ gloomy predictions turn out to be valid. Over-expansion destroys the quality of money, and also the reputation of the pro-debtor economic theories.

This drama has played out over the centuries in many different guises, and with different terminologies in use to describe the two opposing schools of thought about money. Confusingly, the quantity theory of money (QTM) advocates the maintenance of high-quality money, and argues against expansions of the money stock to bring prosperity to the masses. As opposed to it, the Real Bills Doctrine (RBD) argues that the money supply should be expanded to finance productive investment.

The RBD versus the QTM, the Anti-Bullionists versus the Bullionists, the Banking School versus the Currency School, Keynesians versus Monetarists, and most recently, Minsky’s Financial Fragility Hypothesis versus the Real Business Cycle theories, are all illustrative of the quantity-quality controversy which spans centuries of monetary history.

Long-Run Versus Short-Run Perspectives: Davies emphasizes that this quantity-quality pendulum becomes discernible only in the long run. Over any short period of time, spanning a few decades, the immediate benefits of one or the other school of thought seem overwhelming. When tight money is creating recession and unemployment, the benefits of looser money seem obvious to all, and tight money adherents find little support for their positions among the masses. However, in periods of high inflation, the harms of loose money again appear obvious, and tight money policies gain public support. Over any short period of time, one or the other policy seems obviously superior. It is only a long-term examination of history which shows the regularity with which the pendulum swings between the two poles.

There are three conclusions we would like to draw from the quantity-quality pendulum, which emerges from the study of millennia of monetary history.

  1. The study of equilibrium in monetary economics is an illusion. A stable and high-quality money creates an irresistible temptation towards expansion, leading to a breakdown in quality. Excessive money stock destabilizes the value of money and creates powerful forces which seek to stabilize its value and create high-quality money. At no point in the trajectory of the monetary pendulum do we see any resting place, or equilibrium.
  2. The value of money rests on the social consensus created by confidence in the monetary institutions governing the creation of money.  History is full of examples where this confidence was weakened or strengthened, leading to changes in the value of money. Recently, a crisis of confidence in the Euro was stemmed simply by an announcement by Mario Draghi that he would do “whatever it takes” to stabilize and protect the Euro. Conventional treatments of money pay no attention to these psychological aspects of money.
  3. The historical perspective provides deeper insights into monetary theory than conventional methodology. When the Great Depression created tight money, Keynesian theory favoring expansion of money stock emerged and became popular. Inflation in the 1970’s led to rejection of Keynesian theory and a return to the tight-money policies implemented by Volcker. Conventional methodology searches for absolute scientific truths, without realizing that truth may be relative to a particular historical context.

Monetary Economies: A Historical Perspective

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{bit/ly/ME01} A Monetary Economy is one in which the use of money is essential to the functioning of the economy. That is, without money, people would starve, and massive amounts of economic misery would result. Since monetary economies have dominated the world for centuries, this seems to us like a natural state of affairs. However, a study of history reveals that monetary economies came into existence only a few centuries ago, and eventually came to dominate the globe. Most pre-modern societies were not monetary economies. For instance, a feudal economy was not a monetary economy. The landlord owned the land, and workers on the land would receive all necessary support – food, clothing, housing, etc – from him. In return, they would work the land and produce crops, and provide other services. No money was needed for the basic necessities of life. The landlord could sell excess crops for money, and buy fineries from foreigners, but this was not essential for existence. Even today, in many areas of the world, rural subsistence economies far from urban centers are often self-sufficient, and can function without money. These non-monetary economies are excluded from the scope of our study.

Our goal in this textbook will be to clarify how monetary economies function, and how they have evolved over time. This is important because conventional modern textbooks of economics do not correctly describe monetary economies. In these textbooks, money does not serve an essential function. This point is recognized and articulated in these textbooks using the terminology “neutrality of money”. For instance, a popular textbook by Mankiw states that:

Over the course of a decade, for instance, monetary changes have important effects on nominal variables (such as the price level) but only negligible effects on real variables (such as real GDP). When studying long-run changes in the economy, the neutrality of money offers a good description of how the world works.

Exactly contrary to this, Keynes stated clearly in his landmark book entitled The General Theory of Employment, Interest and Prices, that money plays an important role in both short and long run – it is not neutral. If money is neutral, then money plays no essential role in the economy, and so there is no essential difference between monetary and non-monetary economies. In this textbook, we will explain how money, far from being neutral, is a central driver of economic activity. Conventional textbook analysis, which takes money as neutral, leads to deep misunderstandings about modern real-world economies.

The false assumption of neutrality of money led to the failure of economists to understand the causes of the Global Financial Crisis in 2007, and also to their failure to take corrective actions which could have prevented the Great Recession which followed. The battle of ideas, embodied in economic theories about money, is described in “Completing the Circle: From the Great Depression of 1929 to the Global Financial Crisis of 2007”. It is useful to briefly outline how economic theories changed over the course of the 20th Century:

  1. Classical Economists argued for the neutrality of money, along with other ideas, which lead to the conclusion that unemployment can only be a short-run phenomena. In the long run, unemployment will be eliminated by the workings of the free market.
  2. Following the Great Depression of 1929, large amounts of unemployment which persisted for long periods of time was observed. This was directly in conflict with theories of classical economics.
  3. Keynes then came up with a new theory, which had many revolutionary ideas, dramatically different from the assumptions of classical economics. One of the central ideas was that money is not neutral. In particular, in the labor market, the supply and demand for labor, and hence the rate of employment is strongly affected by the quantity of money available.
  4. Keynesian ideas came to dominate macroeconomics for about three decades following World War 2. In particular, the idea that free markets will not automatically eliminate unemployment, leads to the necessity of the government policies required to create full employment. Application of Keynesian policies led to full employment in USA and Europe for about three decades.
  5. The oil shock of the 1970’s led to the failure of Keynesian policies. Development of monetarism by the Chicago school of economists led to the re-instatement of pre-Keynesian ideas about the neutrality of money and the idea that free markets lead to elimination of unemployment. This came to be known as neoclassical economics, because it rejected Keynesian ideas, and went back to classical economics. See The Keynesian Revolution and the Monetarist Counter-Revolution
  6. A concerted campaign was carried out by monetarists to discredit Keynesian theories and rebuild Economics on neoclassical foundations. See Understanding Macro III: The Rule of Corporations. This was highly successful. The Monetarists went from a minority and eccentric school to mainstream orthodoxy by the early 1990s. It became impossible to publish Keynesian and post-Keynesian views in mainstream top-ranked journals.
  7. Over the decade of the 1990s economic performance in the Western world became flat – fairly low growth, but no ups and downs of business cycles which had been characteristic of capitalist economies for a long time. This led to celebrations of “the Great Moderation” by the monetarists. Robert Lucas, Nobel Laureate and leading Chicago school economist, announced triumphantly in his Presidential Address to the American Economic Association in 2003, that we economists have conquered the business cycle, and from now on, recessions will not happen.
  8. The Global Financial Crisis of 2007 took the economics profession by surprise, just as the Great Depression of 1929 had come as a surprise. Paul Krugman wrote the book “The Return to Depression Economics” arguing that insights of Keynes continued to be valid, and to provide deeper insights into the GFC than was available from leading neoclassical macroeconomic theories of the time. Paul Romer wrote a scathing article entitled “The Trouble with Macro” in which he argued that modern macroeconomics is based on fundamentally flawed doctrines, and leads to wildly incorrect predictions.

This is more or less the current state of affairs, as good alternatives to conventional macroeconomics are unavailable in the mainstream. The mainstream macroeconomic theories are based on assumptions which have no relation to reality. For more details, see “Why Do Economists Persist in Using False Theories?”

We will conclude this introduction to monetary economies by discussing some of the key elements of the approach we will be using. First, while mainstream macroeconomics rejected Keynesian ideas, a group of theorists known as Post-Keynesians have continued to develop the ideas of Keynes, building on his fundamental insights. This has led a branch of macroeconomics which provides much deeper insights into modern economies then the monetarism which dominates universities today. Our text borrows from these ideas. However, the critical innovation of this textbook is to study economic theory within its historical context.

As described earlier, historical events, and economic crises, have played a major role in shaping economic theories. In fact, we cannot understand economic theory as an abstraction, removed from its context. This is in conflict with the claim implicit in the use of the word “science” – lessons from study of European societies are universally applicable to all societies across time and space (see: The Puzzle of Western Social Science). In fact, all social theory is developed as an attempt to understand historical experiences of a particular society, and cannot be understood as an abstraction, detached from this historical context. Studying economics within its historical context requires a methodology radically different from that currently in use, in both orthodox and heterodox textbooks of economics currently in use around the world. We will discuss this methodology in the next section.

The Opposition between Capitalism and Islam

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The surprising title is due to the fact that Capitalism is the religion of worship of wealth, so Islam (not Islamic Economics) is the right contrast. Max Weber characterized capitalism as the pursuit of wealth for its own sake, without regards to any benefits obtained from this wealth. For more details see: The Religion of Economics.

To understand why capitalism is a religion, we need to study the Historical Origins of Capitalism. A brief sketch, in outline form, is given below:

  1. Scholastics attempted to build social theory on basis of the Bible and Christianity
  2. Centuries of Religious Wars in Europe led to the realization that society cannot be built on Christian principles.
  3. As a result, Christianity confined to a personal belief in Europe.  Study of social, political, and economic institutions was to be done on secular basis.
  4. Hobbes was the first to build a political theory on purely secular grounds.
  5. Study of Economics on secular grounds soon followed. This eventually replaced the idea of Economics as a branch of moral philosophy

The fact that modern economics is based on the rejection of Christianity is obvious from the way the subject is treated in textbooks. We start with the premise that there is no God, Judgement Day, Heaven or Hell. This means that Man is just another type of animal, and Human society is governed by laws of the jungle: Greed, Competition, Individualism. Since there is no life after death, we should strive to create heaven on earth. For this purpose, individually and collectively, we should strive to maximize weath. Pursuit of pleasure, power, profits is the goal of our lives. These are the founding principles of Capitalism, and are more or less explicitly exposited in modern economics textbooks. There is a stark contrast between these, and the fundamental principles of an Islamic Society:

  1. Generosity vs Greed
  2. Cooperation vs Competition
  3. Social Responsibility vs Individualism
  4. Success on Judgement Day vs. Pleasure, Power, Profits of this world

We briefly discuss each of these contrasts separately.

Generosity vs Greed: The greed of the financial sector has been recognized by many as the root cause of the Global Financial Crisis of 2007. The institution of banking did not emerge until the Biblical “Love of Money is the root of all evil” had been replaced by the Shavian “Lack of Money is the root of all evil”. In contrast with banks, representing greed, the Waqf, representing generosity, is the central financial institution of an Islamic society. One third of the registered land in Ottoman Empire was devoted to Waqf. People acted in the accordance with the Islamic ethic of spending excess wealth on others, to buy rewards of the Akhira

Cooperation vs Competition: The assumption that life is a jungle governed by survival of the fittest leads to the theory of perfect competition. If all agents are selfish, then monopolies are harmful. A monopoly of doctors would be able to extract massive amounts of revenue from the population, as the American Medical Association does in the USA. In contrast, if traders join to provide service, they can bring great benefits to the population. The Guilds of Al-Andalus and Ottomans had the goal of providing service to the population. This is the critical difference between Islamic and Capitalist Firm: Islamic firms are motivated by Service whereas capitalist firms are motivated by Profits

Social Responsibility vs. Individualism: The individualist philosophy of Everyone for himself has led to breakdown of the family in the West. Over 50% of children are born to single mothers. Islam teaches us that the Ummah is like one body, and every part feels the pain of the others. Islam places great emphasis on our duties and responsibilities to our family, elders, children, neighbors. Social responsibility is manifested by spending on others, for the sake of the love of Allah, and is heavily emphasized in the Quran.

Success: Akhira vs Dunya? Corporations causing enormous damage to humanity and the planet due to short term greed for worldly profits and power. Islam teaches us to sacrifice worldly pleasures for the sake of the success of the Akhira: You will not reach the GOOD (BIRR) until you spend of that which you love!  Striving for success on the day of Judgment leads to radically different behavioral patterns from the capitalist striving for pleasure, power, and profits.

We have argued that the Foundations of An Islamic Society are radically different from Capitalism: Generosity, Cooperation, Social Responsibility, Success in Akhira stand in dramatic contrast to Greed, Competition, Individualism, Worldly Success. But this immediately leads to the embarrassing question:

SO – WHERE IS this Islamic Society? WHY, if it is so superior, do we not have a working model, to show the world?

The answer was given by Ibn-e-Khaldun’s landmark history written seven centuries ago. All Civilizations Evolve Over Time from Youth to Maturity to Old Age. Teachings of Islam catapulted ignorant and backward Bedouin into world leadership. These teachings created a civilization which enlightened the world with knowledge for more than a thousand years.

For the past three centuries, the West has taken the lead in the production of knowledge.

Today, the challenge facing the Muslims is to show how we can implement the complete and perfect guidance of the Quran to solve our problems today. This is a deep and difficult discussion, and some aspects are available from The Ghazali Project for
Revival of Islamic Societies. Some talks addressing this issue are available from the links below:

  1. Central Ideas of the Ghazali Project: http://bit.ly/Ghazali1
  2. The Ghazalian Webinars: http://bit.ly/AZwebinars
  3. How to Launch an Islamic Revival: http://bit.ly/azlir
  4. What the World Lost due to the Decline of Islamic Civilization:  http://bit.ly/azrdm

Epistemology & Loss of Meaning

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{bit.ly/AZelm} I recently gave a talk to students of Modern Money and Economics of Sustainability at Torrens University. The original talk has a Q&A session, which has been removed from the slightly modified version given below:

The following writeup provides some details and background missing from the talk, and also links to related materials:

The transition from a traditional Christianity-based society to secular modern society which took place in Europe over the course of two centuries has been studied by many authors. Radical changes took place in all dimensions: politics, economics, society, education, environment. In this talk, I will focus on a dimension that has not been studied heavily: epistemology, or the theory of knowledge.  An article entitled “Wikipedia: Getting to Philosophy” shows that in 97% of the cases, clicking on the first internal link in any article, and repeating the process, eventually leads to an article categorized as philosophy. That is, all human knowledge is founded on philosophy, even though we are generally unaware of this.

The trigger for change in epistemology was centuries of devastating wars between Christian factions. It became clear to all that Christianity could not provide the basis to build a peaceful society. Hobbes was the first to devise a political science based purely on rational considerations. The Biblical approach of the scholastics was rejected. But this meant that all knowledge had to be rebuilt from the ground up. Two schools of thought emerged. Empiricism sought to build knowledge on the foundation of observations, while Rationalism did so on the basis of logic. In the early twentieth century, the two were combined in a theory of knowledge known as Logical Positivism (LP). To simplify, LP asserted that science led to certain truths. Furthermore, Science, based on observations of external reality, was the only valid source of knowledge.     

LP became spectacularly successful because it fulfilled a deeply felt need to replace the lost certainties of faith with the certainties of science. However, there were some major flaws in this philosophy which led to an equally spectacular crash in the late 60’s. Because it is central to our story, it is worth explaining this in greater detail. Ever since Christian epistemology was rejected, European philosophers were searching for a way to prove that religion was superstition and error, while science led to certain knowledge. Intuitively, it seemed clear that religion was based centrally on unobservables, while science dealt with what one could touch and see. However, efforts to differentiate between science and religion on this basis had failed because science also posited unobservables like gravity and electrons. Logical Positivists thought they had found a way out of this dilemma. They argued that one could replace unobservables in science by their observable manifestations, and preserve scientific truth. For example, the invisible gravity could be replaced by the observable manifestation of gravity in the elliptical orbits of the planets.  For a more detailed discussion of LP, see blog post The Emergence of Logical Positivism and the longer article “Logical Positivism and Islamic Economics“.

The work of Thomas Kuhn in his “Structure of Scientific Revolutions” was critical to the eventual rejection of Logical Positivism. There was a “Received View of Scientific Theories” which held that science proceeded by accumulation of truths, in ever-expanding circles. One could hope that eventually all truths would be discovered through this process. However, Kuhn showed that science proceeded via revolutions. A theory – like Ptolemaic Astronomy – would emerge and become popular. Then, slowly, puzzles and problems would start piling up, in conflict with the dominant theory. Eventually, this would lead to a “revolution” – the old theory would be discarded and a new theory would emerge to take its place.  Kuhn’s work itself was a revolution in the philosophy of science. The received view on theories had been widely believed for centuries, but was now abandoned. The automatic equation of “science” with “truth”, which was the central claim of logical positivism, was also abandoned.

One would think that the rise and fall of an obscure philosophy about scientific knowledge would have no impact on our lives. Surprisingly, LP has been of enormous significance in shaping the modern world. Even though the philosophy has been rejected and abandoned, it reshaped the social sciences and university education in the early 20th century. In a book entitled “The Making of the Modern University: Intellectual Transformation and the Marginalization of Morality”, Julie Reuben describes the influence of logical positivism on university education. Traditionally, universities had focused on the development of character, leadership skills, and civic and social responsibilities, as the central element of education. However, Logical Positivism asserted that these were not scientific and hence not “knowledge”. These aspects of university education were gradually abandoned as universities turned towards a purely technical education, providing job market skills to students, without any attempts at teaching them morality. This continues to be the case today, even though positivism has been rejected by philosophers.

Even more disastrous was the impact of logical positivism on the social sciences. The prestige of the physical sciences soared as a result of amazing technological developments, accelerated by the World Wars. However, the Wars had the reverse effect on the prestige of the traditional historical and qualitative approach to the social sciences. If the traditional approach to the study of human societies could not create peace and harmony, a new approach was in order. There was consensus that use of the scientific method to study human society – as signified by the term “social science” – would lead to remarkable progress in this area. But this was an illusion. Methods of great value for studying objective reality fail at understanding the complex and hidden forces that drive human behavior.

The idea of ignoring unobservables, and modeling observable behaviors using mathematical equations, led to a grotesque caricature of human behavior embodied in homo economicus. For a survey of the overwhelming amount of empirical evidence against this model, see Behavioral vs Neoclassical Economics. Since the fundamental unit of society is the human being, abandoning the attempt to understand the unobservable sources of human welfare and behavior is tantamount to abandoning the effort to understand human societies. The results of failure to understand human welfare are apparent in the manifold crises in every dimension of human existence, unfolding around the globe today. Defective social science has led to family breakdown, continuous wars, enormous cruelty, extinction of species of flora and fauna, and environmental crises.  

So how can we begin to repair the damage done by a defective theory of knowledge that asserts science to be the only valid source of knowledge? Perhaps we should start with the most fundamental question that life poses to all of us: how to make the best use of these infinitely precious few moments we have been granted on this planet? Logical Positivism holds that this question is meaningless, since it cannot be answered by science. Capitalism teaches us that we should spend all our time chasing after wealth. Both of these answers are absurd, but are widely believed. The third answer is the half-truth of existentialism, which is extremely popular because it is aligned with the individualism and hedonism that is the spirit of the times.

To put it in popular language, Existentialism holds that I must create meaning for my own life; no one else can define it for me. This is certainly true – our lives are unique, and we must find our own meaning for ourselves. However, wise men have traversed this path for centuries, and have accumulated wisdom, which can serve as our guide. To ignore this advice would be akin to someone ignoring accumulated wisdom in biology, physics, medicine, etc., and trying to recreate this knowledge on his own, starting from zero. Logical Positivism ignores two critical aspects of knowledge: knowledge is socially generated as a collective effort by communities, and knowledge is experiential. Experiential knowledge, like driving skills, or sports, cannot be reduced to propositions, but can be transmitted by experts. If we search for meaning on our own, we will never get beyond kindergarten. The process of social change begins with ourselves; see Alternative Models of Development: Becoming the Change You Want to See

Three Generations of Islamic Economics

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Over the past two months, I have been extremely busy, and I have not had time to post anything on social media. I recently joined Akhuwat University, and plan to create radical changes in education at this university. Aligned with the mission of Akhuwat Foundation, this university provides completely free education for the poor. Very briefly, I would like the university to provide a complete education in 4 years, with three pillars (1) Building Character, (2) Teaching Real-World Skills of Value to Society, and (3) Teaching academics which help us to understand the world around us, not textbook theories which are only useful for answering exam questions. For a more detailed discussion, see: Akhuwat University: A Paradigm Shift in Education

UPDATE: For a recent post on 3GIE, see: Third Generation Islamic Economics: From Nations to Neighborhoods. For sets of lectures on 3GIE, see: A New Approach to Islamic Economics.

For a paper on this topic, see Three Generations of Islamic Economics. The abstract for the paper provides a brief introduction to the terminology:

ABSTRACT:The idea of social science is based on the false assumption that universal laws applicable to all societies can be derived from the historical experiences of European societies. Instead, we argue that all social theory emerges as an attempt to handle challenges facing particular societies within a particular historical context. Within this framework we analyse how the first generation of Islamic Economics emerged as part of the struggle for liberation in the colonized Islamic lands after the second world war. The first generation argued that Western economic systems – capitalism, communism, and socialism – were created by human beings, and led to inequities and injustice, and brought misery to the masses. Instead, they offered the vision of a system built on the teachings of Islam which would serve and promote the welfare of all members of society. Failure to achieve the political control required to create genuinely Islamic socio-political systems led to the emergence of the second generation in the mid 1970’s. Whereas the first generation had rejected capitalist economics , the second generation sought to build an Islamic Economic system within a capitalist framework. The defects of both the capitalist system, and the accompanying economic theory, became glaringly obvious to all in the global financial crisis of 2007-8. This led to a re-evaluation of the 2nd Generation approach and the birth of the Third Generation of Islamic Economics, which seeks to go back to the revolutionary ideas of the First Generation. The critical insight at the heart of the third generation is that capitalism is fundamentally incompatible with Islamic ideals, and must be rejected and replaced by an alternative system built on Islamic foundations. The goal of this paper is to describe the historical contexts within which the three generations emerged. Also, we aim to describe the central characteristics of the third generation of Islamic Economics, which builds on the experiences gained from both the first and second generations.

This paper was presented at a conference on Islamic Finance at the Allama Iqbal Open University on Thursday Nov 2nd 2023. The original presentation was done in Urdu, but with the same slides. A re-recorded video (redone in English) for this talk is linked below:

The Original Urdu Audio recording is available from: AIOU Urdu Audio Recording. Slides for the talk are available from English Slides for AIOU. A transcript of the audio, for the YT Video above, is linked below.

3GIE YT TranscriptDownload

A brief summary of the transcript is given below:

This lecture traces how Islamic Economics has evolved through three distinct generations, each emerging in response to the changing historical circumstances of the Muslim world.

The talk begins by showing that modern social science arose in Europe after the rejection of Christianity, and that it rests on false assumptions about universal laws. Because societies differ across time and culture, the correct method for studying them is historical and qualitative—as pioneered by Ibn Khaldun in his Uloom al-‘Umran. The speaker contrasts this with the positivist, mathematical approach that dominates Western economics today.

The first generation of Islamic economists emerged in the early twentieth century, during the struggle for liberation from colonial rule. They envisioned Islam as a complete alternative to capitalism and socialism—an economy built on generosity, justice, and social responsibility, in contrast to Western systems rooted in greed and individualism. Their project failed politically because Western-educated elites inherited power after independence.

The second generation, beginning around 1976, adopted a reformist, evolutionary approach. They sought to “Islamize” capitalism by adding zakat and removing interest. This effort collapsed after the global financial crisis of 2007–08 exposed the bankruptcy of both capitalism and its Islamic imitation.

The third generation rejects capitalism altogether and seeks to rebuild economics on Qur’anic and Prophetic foundations. It emphasizes action without political power: developing micro-, meso-, and community-level institutions modeled on waqf, qard al-hasan, and bayt al-mal. These institutions can finance human development, strengthen families, and restore social bonds weakened by markets. The talk also introduces innovative ideas like the “triple-zero economy”—zero inflation, zero interest, and zero unemployment—derived from insights in Modern Monetary Theory.

The lecture concludes by linking this intellectual renewal to the Ghazali Project, whose goal is to rebuild all human knowledge on Islamic moral and metaphysical foundations, ending with a prayer for guidance out of darkness into light.

Third Generation Islamic Economics

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{bit.ly/AZ3GIE} At the dawn of the 20th Century almost 90% of the Muslim world was colonized by the West. The two world wars sapped Western powers, and led to the success of movements for political freedom around the Islamic world. First Generation Islamic Economists sought to break away from the dominant Western economic systems of Capitalism and Communism, and create a radically different system based on Islamic foundations. However, Western support of secular modern leaders and militaries throughout the Islamic world ensured the continuation of exploitative colonial economic policies. In effect, European colonizers were replaced by an indigenous class which was educated to protect Western economic interests. Economic policy centered around exporting raw materials and resources, and importing industrial products — in effect selling food for the masses to buy luxuries for the tiny ruling classes. Political Islam emerged as an attempt to dislodge secular modern leadership in Islamic countries, in order to create a just social system based on the Shari’a, and in conformity with Islamic tradition. However, Western support for dictators and militaries throughout the Islamic world proved sufficient to resist these popular movements. It was this failure of political Islam which led to 2nd Generation Islamic Economics.

Pragmatic 2nd Generation thinkers saw that the revolution required for a genuine Islamic Economic system was unlikely. They abandoned revolutionary ideals, and decided to “Islamize” capitalism by making necessary modifications. A formula captures the spirit of this approach:

2nd Gen IE = Capitalist Economics + Zakat – Interest

More broadly, the goal of 2nd Generation Islamic Economists was to modify capitalism by adding essential Islamic principles, and rejecting and discarding elements in conflict with Islam. The goal was to create Islamic economics by evolution, instead of revolution.

My paper on The Crisis in Islamic Economics explains that this 2nd generation approach has failed. 2nd Generation thinkers have not even been able to achieve consensus on the definition of “Islamic Economics”. This is because, Capitalism is founded on pursuit of wealth and pleasure, competition, and individualism. These contrast with Islamic principles of generosity, cooperation, social responsiblity, and pursuit of success on the day of Judgment (not maximization of worldly pleasure). Because of the dramatic opposition in foundations, we cannot combine Capitalism and Islamic Economics. Instead of “Islamizing” Capitalism, we need to reject it, and rebuild the discipline on entirely different foundations provided by Islam. This 3rd Generation Islamic Economics would go back to the revolutionary ideals of the 1st Generation, but also add the experiences and insights of the 2nd Generation in terms of successes and failures in adapting Capitalism to Islam.

Throughout the Islamic World, 2nd Generation Islamic Economics is being taught, based on the idea that we can “Islamize” capitalist economics. I am planning to hold a workshop for teachers of Islamic Economics, starting on Sunday 17th September, which explains how we can teach the revolutionary 3rd Generation Islamic Economics to our students. Instead of creating an “Islamic Microeconomics”, we can reject the entire subject of Microeconomics: the behavior of individual consumers driven by the motivation to maximize worldly pleasure. Instead, Islam is concerned with building social relationships – family, kinfolks, neighborhoods. The unit of analysis for Islamic Economics is the community, so Meso-Economics would be the place to start. Also, we would reject Macroeconomics – the economics of European nation-states, and replace it by considering the economic status of Ummah as a whole. However a critical difference between the 3rd and 1st Generation is that we do not call for a political revolution as a starting point for change. Many aspects of an Islamic Economy can be built within the current social-political-economic system, even though it is in conflict with the central ethos of capitalism. We can build Awqaf to institutional generosity, just like Banks institutionalize the pursuit of wealth. We can build service-oriented firms, in contrast with profit-maximizing firms of capitalism. It is the knowledge which God gave to mankind which launched a revolution in world history. Similarly, acquiring and spreading knowledge of Islamic ideals is itself a revolutionary act. An outline of the workshop, with dates, is attached as a PDF below.

POSTSCRIPT: Above workshop was held in 2023. Another set of six lectures on different topics in Islamic Economics was offered in 2024. Both sets of lectures is available from the website: https://bit.ly/IslamicEcon2023 More recently, I have started work on a new textbook for Third Generation Islamic Economics. For more details, see the homepage for the textbook at https://bit.ly/3gie

workshop-outlineDownload

How to Register for the Course: This course is primarily for teachers of Islamic Economics, but other interested people may also enrol. We hope to provide teachers with skills and resources required to dramatically change the way that they teach Islamic Economics. Certificates will be provided to teachers upon completion of quizzes based on the lectures. Registration process will be different according to the country: see posters for Pakistan, Malaysia and Indonesia. For those outside these countries, use the Google Form linked below is to pre-register. If you fill it out, you will be contacted with details about the registration procedure appropriate for you in a few days.

Imposing Eurocentric Patterns on Islamic Societies

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{bit.ly/AZiepi} Introduction: This is part 1 of a talk on “Rebuilding Economics on Islamic Foundations”, delivered on Monday 24th July 2023 at IIIE, IIUI. We will discuss how social science emerged from the historical experiences of European societies. These experiences are very different from those of Islamic societies. Social, Political, and Economic Institutions designed in the light of European experiences are highly unsuitable for the Islamic world. {Slides 4 Video}

I. The Puzzle of Western Social Sciences:

Since economic, political, and social structures differ vastly across various societies, it is clear that there can be no universal laws, valid for all societies. This can also be proven by noting that societies have evolved over time, from hunter-gatherers to feudal to modern market societies. Since no common principles govern this variety, the idea of “social science” itself represents a puzzle — why is it confidently asserted that there is a science, a set of universal laws governing societies, when it is almost obvious that there are none?

II. The Origins of Western Social Sciences:

Western Social Sciences have their roots in the aftermath of devastating wars between Protestants and Catholics in Europe. The scholastics initially built social science on Biblical foundations, but this approach was rejected due to its association with religious conflict and strife. Consequently, the Enlightenment Project emerged, aiming to rebuild human knowledge from scratch, independent of religious dogma, and create a science of society that promotes peaceful coexistence among different religions. What is critical to note here is that the scholastic approach, based on religion, to building society was abandoned.

III. New Answers to Fundamental Questions:

Rejection of Christianity led to the need to find new answers to fundamental questions about creation of the universe, life’s purpose, ethics, politics, and economics. Enlightenment thinkers rejected authority and tradition, and searched for knowledge based solely on empirical evidence and reason. They had hope to find a superior morality solidly grounded in facts and reason. However, it was discovered that morality cannot be reduced to facts and logic – our hearts are essentially involved. The answers to the foundational questions developed in Europe were dramatically different from those offered by Christianity and Islam.

IV. Toxic Foundations of Western Social Sciences:

Rejection of God led to the idea that the universe was created by chance, and the man is just another kind of animal, produced by evolution. This leads to the idea that the only moral law is survival of the fittest, or the law of the jungle. Also, the goal of life is pursuit of pleasure and power. Modern economics is built on these ideas, which are dramatically in conflict with Islam. That is why it is essential to rebuild Islam on new foundations.

V. Enlightenment Conceit: There is no one like us!

Enlightenment thinkers considered themselves revolutionary builders of the most advanced civilization on the planet. This explains why they thought that social science based on European patterns was universally applicable. They considered other civilizations to be primitive, and thought they would evolve and grow to be like Europe. Two world wars and n early continuous warfare and violence, a looming climate catastrophe, and breakdown of family and society leading to massive social problems in Europe, conclusively refutes the idea that European patterns are worth emulating for others. This is especially so for Islamic societies, which have already been given ideal social patterns in the final revelation of God to mankind.

VI Concluding Remarks:

Christianity, like Islam, was both a belief system, and a set of principles governing societies – this is called “DEEN” or way-of-life in Islamic terminology. Because Christianity led to continuous warfare, it was rejected as “deen” in European societies, and was replaced by social science. The critical point for us is the social science is the public religion of Europe, which replaced Christianity. This public religion is in conflict with Islamic teachings, which is why it is necessary for us to rebuild all of the social sciences, including Economics, on Islamic Foundations. See Rebuilding Social Sciences on Islamic Foundations Part 1 and Rebuilding Social Sciences on Islamic Foundations Part 2