In my previous lecture (see: 10: Origins of Money: Insufficiency of Gold), I explained how money must be created in correspondence to the needs of the economy. This means that any type of commodity money (gold/silver/other) is not suitable, since it is fixed in quantity, and cannot be flexibly expanded or contracted. There has been a substantial amount of controversy and discussion of this statement. In this post, I will provide some thought experiments on a simple economy, to explain this more clearly and concretely.

Remote Rural Economy: Consider a simple village economy, where there are ten small landowners, ten shopkeepers, and ten laborers. There are two seasons: planting season and harvesting season. In planting season, landowners need to hire labor, and buy seed and fertilizer from the shopkeeper. If they succeed in doing so, they will be able to produce ten units of wheat in harvesting season. Suppose that everyone needs one unit of wheat every season to survive – but are happy to consume more.  We will now consider several different monetary scenarios for this simple village economy.

Rich Man Assumption: There is a rich man in the village who has 25 gold dirhams. Nobody else has any money. Landowners go the rich man to ask for a loan. He gives each of them 2 dirhams as a loan at zero interest – just to keep things simple for the moment. They use one dirham to hire labor, and one dirham to buy required inputs from the shopkeeper. Now all of them are able to plant, irrigate, and do all necessary work for the production of wheat. In harvesting season, they all harvest ten units of wheat, which leads to a total production of 100 units of wheat in the village economy.

Closed Economy Assumption: We assume that the village is remote and cut off from outside world. They cannot export surplus wheat, and they cannot import other goods or money from the outside. This is just to keep the model simple, and make it easier to see what is happening in the model. Adding an external sector, where wheat can be exported, is more realistic, but will not change the results which follow. It just makes it harder to understand what is going on.

Traditional Prices: Come harvest season, there are 100 units of wheat in the economy. To simplify even further, assume that wheat is perishable, and does not last more than two seasons. So, laborers and shopkeepers need to buy two units of wheat, to survive. Each of them earned one gold dirham (from labor, and from sale). To make life easier, assume that one gold dirham buys two units of wheat – say that is the traditional price of wheat. Then each shopkeeper and laborer uses the one dirham he has earned to buy two units of wheat from the landowners. Each landowner earns two units of gold by selling four units of wheat, and is left with a surplus of six units of wheat. He returns the loan of two dirhams to the rich man, and enjoys eating the surplus of six units, growing fat, while the others are thin and lean. Both laborers and shopkeepers must spend all they earn to buy two units of wheat they need to survive. Throughout this model, we are assuming the labor costs one dirham, inputs cause one dirham, and the price of wheat is two units for one dirham. Again, this is to simplify the model. Making prices flexible does not change the result that insufficient money will cause economic recession, but it is much more complicated to show this.

The Outcomes: Landowners will grow fat; by assumption of closed economy, he cannot market the wheat outside the village. But, the Rich Man may become Obese: It is possible for the rich man to buy up the surplus, in which case the landowner will keep two units for himself, and still have four units to sell to the rich man. The rich man will buy 40 units of surplus from the ten landowners, and grow enormously fat. In this scenario, the landowners will end up with two gold dirhams, earned from the sale of their four extra units of wheat.   Next year, they will not need to borrow money – they will be able to purchase labor, seeds, and fertilizer, using their own gold. If this scenario is repeated, then the rich man will eventually lose all of his gold to the landowners. However, this is because he is charging zero interest. We explore next what happens when the rich man starts charging interest for his loans. It is important to note that exactly same results can be obtained for Musharaka financing. There is no economic difference between Musharaka and Interest if there is complete certainty about the future (of course there is a difference from Shari’a perspective). Economic differences between the two forms of financing arise when there is uncertainty – the harvest might fail. It is in this case that Musharaka is superior to interest.

Interest Based Capitalist Finance. In a capitalist economy, suppose the rich man lends money at interest. The rich man can calculate that the landowner will end up with a surplus of four units, after selling two to laborer and shopkeeper, and keeping two for himself. So, taking advantage of the desperation of the landowner, who will not be able to plant without getting loan, he demands 100% interest. The loan of two units of gold must be repaid by four units of gold.  The landowner accepts this loan – what else can he do? Now in harvest season, shopkeeper and laborer pay him one unit of gold to buy two units of wheat. He keeps two units for himself. He returns two dirham he has earned from these sales, and he sells the surplus four units to the rich man earning the additional two dirhams he needs to pay interest. In this scenario, shopkeepers, laborers, and landowners have no surplus – neither gold nor wheat. They end up with zero wealth, which is where they started. The rich man ends up with all his gold back, plus 40 units of surplus wheat. A VERY IMPORTANT note here is that rich man MUST buy the surplus wheat in order to enable the landowners to pay back his interest. Suppose for example that he refuses to buy surplus wheat, refuses to accept payment in kind, and demands payment in gold dirhams. The landowners only have 20 dirhams between them collectively, and they need to pay 40 dirhams, which they simply cannot get – because there is not any more gold in the economy (other than what the rich man has). So in this scenario, the rich man can seize their lands. Maybe they can pool money to save five of them, while allowing the rich man to seize the land of the remaining five. But eventually, the rich man will end up owning the entire village.

The Impossibility of Interest: This simple example illustrates a general feature of interest. Suppose a country borrows foreign currency dollars at interest from outsiders. Regardless of how productive their domestic economy is, it cannot produce additional dollars. This country will always default on the interest payments unless their export earnings can cover the principal and the interest. The model also provides insights about the role of interest. In a zero-interest economy, all of the gold eventually ends up with the producers, who are the landowners. In an interest-based economy, all the produce ends up with the financiers. This division and conflict of interest between financiers and producers is very important to understand modern economics.

Other Variations:There are many different aspects of economics which we can illustrate with this simple model of a village economy. We can explore musharka financing, social cooperation methods, and many other variations on the methods of production. But presently, my interest is only in exploring the role of gold. So we move to the next scenario, where there is insufficient gold.

Insufficient Gold. As long as the rich man has 20 dirhams to lend to the landowners, the economy will function at full potential, and each landowner will be able to produce 10 units of wheat for a total production of 100 units for the village. However, suppose that the rich man is robbed, and has only 10 dirhams left after the robbery. Now, what will happen? Ten landowners will come and ask to borrow 2 dirhams, but he can only lend to five of them, because he only has 10 dirhams left after the robbery. This is a catastrophe for the village – five of the landowners will not be able to produce anything, and will starve to death. Similarly, five of the laborers will not find jobs and starve to death. Five of the shopkeepers will not be able to sell their goods and starve to death. The lucky five, the ones who could get the gold, will produce 10 units each, and total village output will be 50 units. This is what an economic recession is – the output which is produced is less than the potential output that could have been produced if all resources were utilized. The economy had the capability of producing 100 units, and all real resources requires to do so are present. BUT, because of insufficient gold, only 50 units can be produced. This is an economic catastrophe.

Token Money Introduced: The rich man keeps his gold in a vault, which is guarded by his servants. Robbery took place, but nobody really knows how much he has. To prevent a catastrophe, the rich man issues notes, which promise to pay bearer gold on demand. He says to the landowners that gold is risky to carry around, there are robbers, so just keep this paper signed by me, and I will redeem it in gold upon presentation to me – provided it has a proper chain of ownership. That is, if a random stranger shows up with the paper, I will not redeem it.  But if the shopkeeper comes to me and says I got this from the landowner by selling him seeds, I will redeem it. This way your gold stays safe with me. Now technically, the rich man can only issue ten IOU’s for the 10 dirhams he has, but suppose that he has learnt about fractional reserve banking. The landowners are desperate to get the gold, because they will starve unless they can buy seeds and hire labor. So all ten landowners accept IOU’s for 2 units of gold and go about their business. The number of IOU’s of the rich man in circulation are 20, but he only has 10 dirhams in his vaults. But, as we have seen earlier, all of the IOU’s will come back to him anyway – just like all the gold came back to him. So, no one will actually ever encash their gold, because the landowner uses it to make purchases and hire labor. Laborers and shopkeepers use their gold to buy wheat.  And landowners use their earnings from sales to repay the rich man, with interest.

Fractional Or Zero Reserve: Finally note that in this last scenario, the rich man’s vault may actually contain ZERO gold – no one ever actually encashes their note for gold. All the IOU’s come back to him. So what do we learn from this thought experiment? The key point was to show that the amount of money must vary flexibly with the size of the economy, and gold is not suitable for this purpose. If money is gold only than if the landlord has 2 units, only one landowner will be able to produce. With 4 units, two landowners will produce, rest will die of hunger. Only if we have 20 units of gold in circulation will it be possible to have full employment of all resources. Insufficient money will lead to recession and unemployment in the economy. This is not a hypothetical scenario – real world economic history is chock-full of examples where insufficiency of money led to recessions, depressions, and high levels of unemployment.

Token Money Varies Flexibly With Needs of Economy: Next note that token money solves the problem. If the rich man issues IOU’s to all who ask for loans, then the supply of money expands flexibly to meet the needs of the economy. The IOU’s will exactly match what is needed by the producers. For example, suppose that additional fertile land becomes available so that landowners expand to 20 instead of 10. Now an amount of gold which was sufficient for all would become insufficient for the needs of this expanded economy. However, token money would be able to meet the new expanded needs for money.

Keynesian Economics: The above example shows one of the two central lessons of Keynesian Economics. Suppose there are a 100 villages in the country, so that there are 1000 farmers. Then we need to get them 2000 units of money to ensure that everyone of them can produce. If the money supply is insufficient – only 1000 units of money are available, then half of the farmers will remain unemployed, and will be unable to produce. This is a tragedy, because all the real resources for production are present – we have seeds, land, labor, – but due to a bad monetary system, which could not provide for needs of farmers, production does not take place. It is also possible to show how excess of gold can lead to inflation, just like insufficient gold leads to recession. This is one of the central lessons of Keynesian Economics – the money supply must match the needs of the economy: too little leads to recession, and too mujch leads to inflation. However, this material should be enough to absorb on first round, and more complicated models will be left for later. The main point of this post is to show that no type of commodity money is suitable for the needs of a market economy, because it cannot be expanded or contracted to match the needs of the economy. To be able to flexibly expand money supply to match the needs of a growing economy, some sort of token money is needed. In the above example, we have used IOU’s, but there are many other types of token money which can be created and used for this purpose.

Introduction: {bit.ly/AZddd}

The first verses of the Quran revealed to our Prophet SAW commanded him to Read, and promised to give mankind knowledge which they did not have. This final message of God to humankind, revealed over the course of 23 years, launched the greatest revolution in human history. It transformed ignorant and backward Bedouin to world leaders. It launched a civilization which enlightened the world with knowledge for more than a thousand years.

Obviously, an “Islamic” School should be committed to providing this knowledge. It is an article of faith that the knowledge given to us by God provides us with complete and perfect guidance until the day of Judgement. Furthermore, this knowledge must be incomparably superior to any knowledge produced by human beings. Those who receive an Islamic education should be deeply aware of the central importance of the teachings of the Quran, and filled with the missionary zeal to spread this light, which is the only means of removing the darkness of ignorance.

Unfortunately, most modern Islamic schools do nothing of the sort. In fact, without intending to, they often end up teaching students lessons which are in direct conflict with central messages of Islam. Most often, educators are not even aware that there is any conflict between the knowledge they are providing and Islamic teachings. But even those who are aware, are helpless to rectify the problem. At the moment, suitable solutions to the problem do not exist. This is among the most important challenges facing the Ummah: creating an educational process which makes Islamic teachings the core of its curriculum, and also caters to modern needs.  In this essay, my primary goal is to articulate clearly and sharply the nature of the dilemma facing us, in terms of providing an education to the Muslim youth. The concluding remarks provide some hints toward the solutions, which will be discussed in greater detail in a separate post.

The Challenge

Superficially, it appears that the solution is simple: simply teach both Western syllabus and our traditional Islamic syllabus in parallel. This is approach currently implemented in nearly all Islamic schools, because there is no feasible alternative in existence. What very few realize is the fundamental conflict between the two approaches to education. A Western education produces a Western worldview, according to which mankind was in darkness and ignorance until the Renaissance of Europe. After the rebirth of Europe, Europeans learned to think rationally, while the rest of mankind remained steeped in superstitions. As a result of their extraordinary intelligence, Europeans forged far far ahead of all others on this planet. The knowledge they have created over the past three or four centuries is the greatest treasure currently in possession of mankind. This knowledge has enabled them to dominate the world, and to create the most advanced civilization in human history.

Obviously, this Eurocentric narrative, which is built into a Western education, conflicts dramatically with the message of the Quran. Among these, the conflict about superiority of Western knowledge is of central importance.  The idea that human-produced Western knowledge is superior to God’s gift of knowledge in the Quran is not compatible with faith in Islam. At the same time, the evidence for superiority of Western knowledge seems so overwhelming that it appears impossible to challenge it:

1. The West is rich and powerful, because of the knowledge that they have. Those who have knowledge of the Quran are poor and powerless.
2. The key to worldly success today, individually and collectively, is Western knowledge. Quranic knowledge seems irrelevant.
3. Western knowledge shapes our lives from moment-to-moment in all dimensions. From our mobile phones to buildings to cars to houses, all aspects of our lives are deeply and directly affected by Western knowledge. In contrast, Quranic knowledge touches only a very small part of our modern lives.

In presence of this powerful evidence to the contrary, how can we defend the idea that the Quran provides us with complete and perfect guidance? Why does the Quran say that believers will be led to the light, and others will be led to darkness, when our eyes show us that the opposite is true? Why does the Quran say that let those who have been given this gift of the Quran rejoice, for it is better than all else that anyone can gather?

Potential Solutions

An Islamic education should teach us satisfactory answers to the questions above – and thousands of other related questions which arise. But, today, most Islamic schools end up reinforcing and strengthening these confusions and contradictions in the minds of students, without providing any satisfactory resolution.  Some of the standard methods adopted to resolve the dilemma are listed below:

1. The Quran and Sunnah provide us with guidance about success in the Akhira, while Western knowledge provides us with guidance about success in this world. So, both types of knowledge are necessary, and they complement each other. While superficially satisfactory, this raises many difficult questions. So, the Quran is not complete guidance – it is only useful for Akhira, and not for this world? If this is so, then how did Muslim, under the guidance of the Quran, succeed in building a worldly empire which dominated the world for a thousand years? Also, does not the Quran promise worldly success to the believers?
2. It is Quranic imperative to seek knowledge from all corners of the world, from the cradle to the grave. We Muslims have fallen behind the West because we failed to obey the order to seek knowledge. Today, seeking Western knowledge is exactly what the Quran demands of us.  This solution would work if Western knowledge was objective, value-free and neutral, as it claims to be. Unfortunately, appearances are deceptive. Western knowledge contains explicit claims of Western superiority: “Who is mightier than us in strength?” A Western education teaches us that mankind was in a state of ignorance and superstition until the dawn of reason occurred with the Enlightenment of Europe. After learning to reason, the West made progress in leaps and bounds in all dimensions of life. Today, everything worth knowing has been produced by Western intellectuals. Obviously, these messages conflict directly with the teachings of the Quran.
3. The Islamization of Knowledge Project is based on the recognition that Western knowledge is like the snake’s venom – one can extract lifesaving medicines from it, by eliminating the poisons. In principle, this is an attractive solution. But, in practice, it has not been successful. Recognition of the need to combine traditional Islamic and Western education led to the creation of two universities (and numerous other institutions) – International Islamic University in Islamabad and in Kuala Lumpur. I served as the Director General of the International Institute of Islamic Economics at IIUI. I personally witnessed the failure of this attempt to synthesize Islamic and Western teachings on economics. The problem is that the two are diametrically opposed to each other, and cannot be combined. To create Islamic Economics, we must reject Western economics, and rebuild the discipline on foundations of the Quran and Sunnah. Unfortunately, shock-and-awe of Western knowledge has prevented this from happening. The result is that we end up teaching two bodies of knowledge in conflict with each other. The student learns that Western knowledge will lead to degrees and jobs, while Islamic knowledge is not useful for either. So, this project of combining the two bodies of knowledge fails. See my post on the Crisis in Islamic Economics for a deeper discussion.

CONCLUDING REMARKS:

So, where does that leave us? When Islamic Schools teach Western knowledge from Western textbooks, students automatically absorb messages of the superiority of Western knowledge. Furthermore, market forces lead these schools to make getting good grades, degrees, and jobs, their goal. Then, regardless of what they teach in their Islamic studies courses, the students will realize that success in life depends on Western knowledge, while our private lives may be aligned with Islamic teachings. This is hardly satisfactory.   

So, what is the solution to this dilemma? I will discuss this in greater detail in a later post. For now, let me indicate that I have a sequence of 10 lectures which provides an outline of what we need to do. See How to Launch an Islamic Revival? There is no easy solution, and multidimensional efforts are required. I have prepared a set of about 13 lectures with 5 parts each for a total of 65 units of education which provides details of the Ghazali Project we need to undertake today, to counter the Modern Mu’tazala, marked by the belief in superiority of Western knowledge to the Quran and Sunna. Teachers in Islamic Schools should go through these lectures, which provides ways of thinking very different from those which we acquire via a Western education. May Allah T’aala enlighten us with the Noor of His guidance, and lead us out from the darkness into the light.

POSTSCRIPT: There are several additional readings discussing how we can create an Islamic education in both substance and style. See: Transformative Teaching: Changing the Lives of Our Students, Islamic Pedagogy, and The Greatest Teacher of All Time

{bit.ly/AZroe} Maeshiro (2016) in “The Capitalist Religion and the Production of Idols“, writes that Capital is the God, and Capitalism is the religion of modern society. Gauthier’s review of Nelson’s Economics As Religion states that “economics became the modern theology that replaced traditional theology as the set of doctrines that give meaning to our social reality and hope to our endeavors to improving our lives … (Nelson analyses) the works of the major twentieth century American economists to show how professional economists are equivalent to the priesthood of this religion of economics which justify, disseminate and legitimize in scientific discourse, normative foundations required for a rapidly growing modern economy”. These articles provide numerous additional sources which assert that modern Economics is a religion. Nonetheless, Economists vehemently deny this charge, and argue that their discipline consists purely of positive and descriptive statements about how modern economies function, without any value judgments.  We can achieve substantial clarity about this dispute by studying the history of the origins of economic theory.  

Over a century of enormously destructive religious wars in Europe convinced everyone that social theory could not be built on religious foundations. The scholastic approach, building on the Bible, was rejected, and the entire structure of the social sciences was rebuilt from scratch. Because of urgent need, political science was the first of these secular social sciences to emerge. In Religion and the Rise of Capitalism, Tawney describes the replacement of religion by reason as follows:

… the secularization of political theory … (was) … the most momentous of the intellectual changes which ushered in the modern world. … The theological mould which shaped political theory from the Middle Ages to the seventeenth century is broken; politics becomes a science, ultimately a group of sciences, and theology at best one science among others. Reason takes the place of revelation, and the criterion of political institutions is expediency, not religious authority. Religion, ceasing to be the master-interest of mankind, dwindles into a department of life with boundaries which it is extravagant to overstep.

Widespread myths about the nature of the Enlightenment have been debunked by historians, but continue to dominate popular discourse. Nonetheless, for deeper understanding of the status of Economics, it is essential to understand the ambiguities of Enlightenment “rationality”. Enlightenment thinkers sought to reject Christianity in-toto, and rebuild the entire structure of human knowledge starting from zero. However, they could not escape their historical and cultural context. The apparently neutral and secular “rationality” taken to be the sole basis for valid knowledge implicitly incorporated many assumptions from Christianity, while explicitly rejecting many others. We provide one illustrative quote from The Age of Enlightenment: The Eighteenth-Century Philosophers by Isaiah Berlin: “Enlightenment thinkers aimed to build a secular and rational order, but they often drew on concepts and values deeply rooted in Christian thought. Their ideas were shaped by their cultural background, which included both the legacy of Christianity and a desire to move beyond it.“

Enlightenment thinkers enthroned rationality as the sole source of valid knowledge. However, many of them failed to realize that reasoning always goes from premises to conclusions. Valid reasoning can never add information to the premises – the knowledge expressed in the conclusions must already be present in the premises. For example, in the famous deduction that “I think” => “I am”, the premise “I think” already assumes the existence of the subject “I”. Kant, in his Critique of Pure Reason, expresses awareness of this conundrum, and introduces the “synthetic a priori” to resolve it. Some knowledge must be present prior to the use of reasoning, to enable us to build upon it. Russel and Whitehead sought to build all of mathematics based on only two primitive notions: set and inclusion. These two were taken as primitives to be understood intuitively, not subject to further explication. The point is that even mathematics cannot be built from scratch – some primitive a priori knowledge must be assumed.

Enlightenment philosophers could not avoid incorporating concepts and values deeply rooted in Christianity into their definition of rationality. Similarly, while Economists claim that their discipline is value-neutral, many values are built into the conceptual frameworks used as foundations of modern Economic theory. Hausman and MacPherson in Economic Analysis, Moral Philosophy, and Public Policy explain that “in defending their model of rationality, mainstream economists implicitly espouse contestable moral principles”. It is obvious that “rationality” is a normative concept, and the book shows that norms of rationality advocated by economists conflict strongly with nearly universally held intuitive and commonsense notions of morality. For example, economists believe that it is rational to renege on a promise, if material gain would result from this. 

It is this switch from morality (good vs evil) to rationality (intelligent vs foolish) that is the key to understanding Economics as a religion. Once we realize that the normative principle of rationality serves a replacement for Christian morality, we can reconstruct the foundational principles of the religion of Economics. Pre-Enlightenment European societies were united on the Christian idea that the goal of life was to seek salvation on Judgement Day. Enlightenment rejection of Christianity eventually led to the new goal of seeking to maximize pleasure in this worldly life. Tawney, in Religion and the Rise of Capitalism, provides the complex historical details of how this transition took place over the course of two centuries. A central aspect of this transition is the replacement of the Biblical “Love of money is the root of all evil” with the Shavian “Lack of money is the root of all evil”. As Tawney puts it, 16th Century Thought insisted that “Christianity has no more deadly foe than the appetitus divitiarum infinitus, the unbridled indulgence of the acquisitive appetite”. However, by the 19th century, it became an unquestionable truth that religion should be confined to the private sphere, and the pursuit of wealth was the natural goal for individuals and society. Schooled in secular modernity, we think of this as a replacement of religion by reason. The crucial point I want to make here is that this was the replacement of the religion of asceticism by the religion of Mammon.

The use of the word “rationality” for the worship of Mammon automatically makes all counter-arguments appear “foolish”. Amartya Sen’s essay on “Rational Fools” explains how behavior which economists call rational would be foolish in ordinary language. The title of the essay displays the linguistic trap created by economists’ appropriation of “rationality”: it is self-contradictory to say that rationality is foolish. The only way to wriggle out of this straitjacket is to reclaim the ordinary language usage for the word “rationality”. We can do this by using E-rationality for the Economists’ usage of the word, and distinguish it from O-rationality or just plain rationality, for the ordinary language usage. Once we do this, it is easy to see that E-rationality and O-rationality are in strong conflict in many different areas. E-rationality is the normative framework for the religion of Economics, and differs strongly from nearly universal notions of morality, common to many different moral frameworks.

E-rational behavior, embodied in the infamous homo economicus, is sociopathic. Is it rational to be a sociopath? While economists think so, no one else does, for good reasons. A “society” exists because we are tied to each other by social networks outside of the market framework. Polanyi’s masterpiece “The Great Transformation” explains that in a traditional society, market transactions are embedded within society. A market society reverses this priority, subordinating social relationships to the market. To understand this better, consider the moral question of whether a drugstore owner should give a life-saving drug to someone who needs it, but does not have the money to pay for it. In a market society, private property, and the right to do whatever one wants with one’s property takes precedence over social responsibility. So, the question does not arise: of course, the drugstore owner should withhold the drug, unless, as an individual quirk, he is moved by compassion and sympathy. In a traditional society, the answer is equally definite, but the opposite. How can a human being allow another person to die, when he has the means to save his life? The social relationship takes precedence over the market. The main point of this essay is that the choice between the two options is a moral choice. It is not a question of “reason” versus “religion” but that of market-religion versus natural human morality, embodied in all traditional religions.

Once we strip away the disguise of “science”, it is easy to see why all traditional societies have warned against the worship of Mammon, aka Economics. E-rationality makes the pursuit of wealth the highest goal for individuals and society, with disastrous consequences. By rationally maximizing their profits, financial institutions stripped millions of their life-saving in the Global Financial Crisis, creating homelessness and hunger in the USA not seen since the Great Depression. The concealed moral framework of Economics rationalizes the extreme and increasing concentration of wealth. E-rationality teaches us that scarcity, and not lack of compassion, leads to a billion people living below poverty line, when planetary resources can easily provide for basic needs of entire humanity. As Zygmunt Bauman shows in Modernity and the Holocaust, it is perfectly rational to burn millions of living people, if this is considered desirable for the welfare of the majority. Similarly, wars which kill millions to enrich corporations are perfectly rational. In fact, according to Friedman’s views, it is the moral responsibility of corporations to kill millions, if it will bring them profits and is not illegal. Manufacturers of baby milk formula, who know that their product will kill millions of babies, use this justification as defense in courts (see movie: Tigers).

As in A Brave New World, Economists distort language to prevent critical thought. We can counter by differentiating between E-rationality and the ordinary language rationality. Max Weber said that the spirit of capitalism is the pursuit of wealth for its own sake, to the point of being irrational. Economists have deceived us by turning irrationality into E-rationality, and dropping the E- prefix. We must re-learn the difference between rationality and irrationality, in order to prevent the outcome depicted so well in the cartoon:

{bit.ly/AZccp5} In previous parts of this talk (P1, P2, P3, P4) discussing the current economic crisis in Pakistan we have argued that economic theory itself is a source of the problem: it blinds us to the reality of the problem and makes it any makes us unable to find Solutions. To learn what modern economics is and why it is an obstacle to understanding the causes of our current crisis,this Part 5 studies the roots of this discipline, which lie in the enlightenment of Europe.

More than a century of deadly religious wars in Europe led to the search for ways to organize society which would make room for tolerance. The Enlightenment is the name of the intellectual movement from many different diverse sources which attempted to find the basis for creating a tolerant Society in Europe. Enlightenment thinking led to the social sciences, an attempt to organize society on secular foundations, without any recourse to religion. Thus, social science is a product of the Enlightenment and understanding economics, the queen of the social sciences, requires understanding the Enlightenment.

{bit.ly/AZcecp4} As explained in earlier parts of this talk (see: Part 1, Part 2, and Part 3), modern economic theory is a tool for deception. The neocolonial powers can extract benefits from an enslaved economy, but not from an independent and empowered one. To make the masses accept their own exploitation, they have to be educated to struggle against phantom enemies, thinking of them as the source of their problems. Modern economics is the crucial tool to accomplish this brainwashing. It completely ignores history and politics, thus blinding people to the real reasons for our economic crises. Instead, we pursue irrelevant goals like taxation, export promotion, good governance, foreign direct investment, among others. In this essay, I will explain how specific economic theories are used to deceive the masses and support power.

Guiding Principles for Study of Social Theories: Fruitful study of human societies requires adherence to two guiding principles:

1. Social theories cannot be understood outside the historical context of the societies that produced those theories.
2. Social theories are always part of a power struggle between different social classes within a society.

In particular, power shapes the educational system, which provides approved knowledge and censors prohibited knowledge. It is often not recognized that this soft power is an essential supplement to the hard power. Physical force is not sufficient to achieve compliance of the masses; rather, they must be educated to believe in the social system which exploits them. Suppressing the history of the origins of the system creates the false impression that “it has always been like this”, which is important in achieving acceptance. We provide a brief sketch of these historical origins, as an antidote.  

Historical Origins of Social Science: Social science in Europe emerged as a result of the battle between science and religion. The influx of knowledge from translations of Arabic texts in libraries of reconquered Islamic Spain ended the dark ages of Europe. The Catholic Church’s attempts to censor and suppress this knowledge, often in conflict with Church doctrines, led to a split of the Church and more than a century of factional warfare between Protestants and Catholics. This bitter experience with religious warfare led Europeans to reject of the scholastic approach to social theory, based upon the Bible. Secular modernity built social sciences on explicit rejection of religion and adoption of observations and logic as the sole valid sources of knowledge. Christianity was confined to a private belief, and social science replaced Christianity as a guide for constructing society.

Secular Modernity: The worldview of secular modernity is radically opposed to Christianity. In Christianity, success is on Day Judgements, due to Good Deeds and Grace of God. In secular modernity, there is no creator, no life-after-death, no judgement day. The universe and our lives are meaningless. Life is a jungle of ferocious competition, governed only by survival of the fittest. The goal of life is to maximize pleasure, power, and profits. These conceptions underlie all of the social sciences, including modern economic theory.

Origins of Capitalism: Polanyi’s Great Transformation shows that traditional societies, around the globe, were built on cooperation, social responsibility, and generosity. Secular modernity, on the other hand, was built on competition, individualism, and greed. Historical circumstances in Europe led to the triumph of secular modernity over traditional, Christianity-based, European societies. Eventually, this led to capitalism and market society, where values of the market overwhelm traditional social values: Career over family, profits over social responsibility, and accumulation of wealth over accumulation of friends.

Within this historical context, we turn to the specific question of how modern economic theory is used to deceive us about how capitalist economies function. Karl Marx provided an accurate description of how a capitalist economy works, which remains valid today.

Marx’s Analysis of Capitalism: Ownership of Capital creates the capitalist class. These are a small minority of people with large amounts of wealth and power. The capitalists need laborers to produce goods, which are sold for profits. The less wages paid to laborers, the greater the profits of the capitalists. How much is paid to labor depends on the relative power of the two classes – capitalists and laborers. Because the capitalists have a lot of power, they exploit workers, paying them low wages to make huge profits.

Modern Economics: The main function of economic theory is to counter this picture of capitalism, and replace it by an alternative description of the economic system as being fair, just, equitable, and efficient. In particular, the charge that capitalists exploit labor must be refuted. This is accomplished by a number of stratagems. One of the most important hidden stratagems is the idea of “Economic Theory” itself. This suggests that there is an autonomous economic system, which operates outside the control of our human wills, just like the planetary system. This conceals the fact that we create and shape the economic system via social consensus. Beyond this, modern economics rests on three pillars, each of which conceals or rationalizes the power of the capitalists.

Rational Behavior: The idea that it is “rational” for human beings to maximize pleasure, stretches the meaning of “rationality” beyond the breaking point. If we look through the veils of mathematics, we find that economists are advocating sociopathic behavior as “rational”. This is not descriptively accurate. The vast majority of human beings act with kindness and consideration for others. It is also not valid as a normative ideal. Our welfare and survival in an interdependent society depends on our human relationships, which are jeopardized by selfish behavior. Economists’ rationality (E-rationality) differs greatly from the ordinary language usage of “rationality”. The central function of E-rationality is to justify the sociopathic behavior of capitalists, currently putting the planet at risk, for the sake of private gains.     

Maximizing Profits: The idea that firms maximize profits is not descriptively accurate. Firms incur costs during the production process, but produced goods are sold in the future, at prices which depend on a lot of factors out of control of firms. Because of the radical uncertainty that prevails about the future (e.g. the Global Financial Crisis), future prices, and hence profits, cannot be computed. Profits differ in short-term, medium-term, and long-term. The literature on firm behavior rejects profit maximization as being too simplistic, and offers many more sophisticated alternatives. Firms try to increase market shares, aim at survival and growth in an uncertain environment, try to maximize stakeholder satisfaction, or strive for innovations. The idea of “profit maximization” universally accepted in economics textbooks is not accurate either descriptively or normatively. But it is a useful rationalization for the capitalist motto “Greed is good”.

Supply and Demand: The idea that prices are determined by the market forces of supply and demand hides the power of capitalists to set prices. Economics textbooks mention that supply and demand theory does not work when firms are large enough to influence prices. But, subsequent analysis assumes – without justification – that the supply and demand model is universally valid. As Alan Blinder has shown in “Asking About Prices”, most firms set prices. Naomi Klein’s “No Logo” shows how firms distinguish generic products by using labels, so as to create market power, and the corresponding ability to set exploitative prices. When firms have market power, even standard economics textbooks acknowledge failure of the S&D model for prices. Instead, a model of prices as markups over costs emerges as a good first approximation of actual firm behavior in setting prices.

Modern economics is built on these three foundational pillars: utility maximization for consumers, profit maximization for firms, and Supply and Demand as the theory of price determination. These theories are not descriptively accurate, and not useful as normative ideals. However, they are very useful in concealing the power of the capitalists to exploit labor, in order to create excessive and unjustified profits. Two excellent books which explain the errors of modern textbooks, and illustrate their failings with real world examples, are listed below:

• Hill, Rod, and Tony Myatt. The Microeconomics Anti-Textbook: A Critical Thinker’s Guide. Bloomsbury Publishing, 2021.
• Myatt, Tony. The Macroeconomics Anti-Textbook: A Critical Thinker’s Guide. Bloomsbury Publishing, 2022.

{bit.ly/AZcecp3} Part 3 of Current Economic Crisis in Pakistan and Solutions. Original Urdu Lecture at COMSATS on Monday 11th Apr 2023 has been redone in English, split into small parts. We start with a summary of the previous Parts 1 & 2 – See: http://bit.ly/AZcecp1 and http://bit.ly/AZcecp2

Part 1: The problem is straightforward: we import more than we export, and lenders enslave us, forcing bad economic policies upon us. The solution is equally simple: become self-sufficient, produce all essential needs domestically instead of relying on imports for necessities, and switch production to domestic demand, producing goods for the local market instead of exporting to foreigners. Part 2: However, this solution is not on the table for discussion. Economic experts talk about taxes, exports, corruption, regulation, privatization, FDI, ease of doing business, and everything under the sun, but not the source of our problems or their solution. Why is this the case? Because false economic theories taught in universities blind us.

The video of this part 3 is followed by a summary.

To understand the roots of our current crisis, we must study the historical context that created it. Economics, politics, and society cannot be understood without this context and without an understanding of the political power struggles within society. Currently, around the world, Economics is taught in isolation from politics and history. This blinds us to the real source of our economic problems and sets up phantom enemies that we waste our time cluelessly fighting. We can counter this by studying our economic problems within their historical and political context. The relevant history is summarized below.

European powers had direct or indirect control over 90% of the globe in the early 20^th Century. This allowed them to extract resources from the world, which made them rich, and the rest of us poor. It is important to understand that this colonization and extraction of resources occurs with the consent of the colonized (see: The Conquest of Knowledge). The colonizers are too few to enforce their will by physical force. Instead, they create an educational system which teaches admiration and love for the West, and contempt and hatred for indigenous culture and heritage. Those who absorb these lessons most deeply are invited to cooperate with the colonizers in looting their own country, and exploiting their own countrymen. This educational system produced a coconut class, which was brown on the outside, but white on the inside.

The two world wars in early 20^th Century sapped European power and allowed independence movements to succeed. However, power in the former colonies shifted from the European colonizers to the domestic coconut class. This class continued to pursue colonial policies of exploiting their own country for amassing wealth, and using the educational system to brainwash the masses into accepting these policies.

The transition from European to US dominance occurred after the World Wars, with overt colonization abandoned in favor of indirect colonization via puppet regimes and control of the military. Operation Ajax/Boot overthrew the popular, democratically elected leader Mosaddegh in Iran, and replaced him with a USA/UK puppet, Reza Shah Pahlavi, for control of Iranian oil. The concept of “regime change” was born. Instead of direct colonization like the UK, USA would use indirect means to achieve the same goals. This indirect colonization rests on two pillars. The first pillar is a small minority of domestic power groups are coopted into pursuit of economic policies which further US interests. The second pillar is an educational system which teaches intellectuals economic theories which blind them to reality, and make them pursue policies which impoverish the nation, and enslave it to foreign interests.

The financial basis of the system is outlined by Jason Hickel in Aid-in-Reverse: How the Poor Countries Develop the Rich. He describes how the poor countries receive 1.3 Trillion USD in financial inflows, aid, etc. from the rich. But, the poor transfer 3.3 Trillion USD to the rich countries, essentially preventing any possibility of development of the global South. The financial inflows are really payments to the local power elites (army, bureaucrats, politicians, influential people, and media) as well as infrastructure and weaponry required to maintain the neo-colonial power structures for exploiting the resources, human and otherwise, of the colonized. The purchased power elites act on the behalf of the colonizing powers, and implement policies that impoverish and exploit local resources for the benefit of foreign corporations. But, other than this hard power, soft power in the form of control of media and education, is required to create the assent of the colonized to their own exploitation. Among the most powerful tools within this arsenal are false economic theories, which keep the masses and their university-trained thought leaders engaged in fighting phantom enemies. These economic theories are inherently incapable of recognizing and addressing the real sources of our problems, since history, power, armies, and politics are deliberately excluded from the scope of study

Decolonization of minds is an essential part of the solution. Colonized minds follow policies dictated by neo-colonizers, falsely believing they are meant for their welfare, unable to see the problem and its solutions. Economic theory is at the core of the tools for brainwashing, teaching that the goal of life is maximization of pleasure. Developing an alternative to Western education is one way to counteract this process, particularly in Islamic economics.

In conclusion, to solve our economic problems, we need to recognize the historical context that created them and the mechanisms that perpetuate them. Decolonization of minds is an essential part of the solution, as colonized minds follow policies dictated by neo-colonizers, unable to think out of the box and see the problem and its solutions. Developing an alternative to Western education is one way to counteract this process, particularly in Islamic economics. We need to stop wasting our time fighting phantom enemies and recognize the true source of our problems to become truly self-sufficient and produce all essential needs domestically.

LINKS to related materials:

• Impact of Colonial Heritage on Economic Policy in Pakistan
• Decolonization: Required for Solutions to Crisis
• Understanding Colonization & Decolonization

“A University Economics degree today is more of a lobotomy than an education” – Steve Keen.

{bit.ly/AZcecp2} This is part 2 of a talk on “Current Economic Crisis in Pakistan & Solutions: An Islamic Perspective” given by Dr. Asad Zaman at COMSATS on Monday 10th Apr 2023. Video of original Urdu Talk: http://bit.ly/YTcrisis English Slides for Talk: http://bit.ly/SScrisis  This is an English version, broken up into smaller parts. For Part 1, see Current Crisis in Pakistan: Easy Solutions Blocked by Power.  This Part 2 explains that one of the barriers to diagnosing the problem, and finding solutions, is FALSE economic theories.

Even though the problem is simple, and solution is simple, policy makers and economists are NOT seeing it! Why? Because Economic Theory puts blindfolds on our eyes, and makes it impossible to see the problem, or the solutions.  To understand why, we must review some history, which is essential to understand modern economics:

1. Collapse of Soviet Union – largest country on the planet – in 1991.
2. American think tanks start planning the “American Century” – a project for global domination by the USA.
3. A collection of Economic policies known as the “Washington Consensus” emerges. The World Bank enthusiastically promotes these policies as the only path to development.
4. The other path – communism – which had led both Russia and China to amazing growth paths, was now closed. This closure of options permits Washington to impose its desired economic policies on the rest of the globe.

What is the Washington Consensus? It is a standardized collection of economic policies to be adopted everywhere across the globe, supposedly to create economic growth and development. This is puzzling, because one would think that appropriate development policies would vary from country to country depending on their situation and configuration of opportunities and constraints facing them. The mystery can be resolved by looking through the appearances to the hidden motives behind these policies: facilitation of maximal exploitation of the poor countries by the multinational corporations which run the world today. Of the ten policies recommended by the Washington Consensus, one set is to cripple the government and private sector, to prevent them to compete with, or regulate, the activities of these corporations:

• Fiscal Adjustment: refers to reducing government expenditures, and hence the power of the government, on the pretense that this will help reduce inflation.
• Tax Reforms: Increasing tax burdens on domestic enterprises prevents them from being able to compete with foreign corporations.
• Deregulation: This plank allows foreign corporations at act freely, without government regulations.
• Privatisation: State Owned Enterprises are the only ones with sufficient power and resources to compete effectively with foreign corporations. These must be removed, to clear the field.
• Removal of Subsidies: Subsidies enable local institutions and corporations to compete with foreigners, and must be removed. Social security programs enable the people to live, and deprive foreign corporations of cheap labor, and so these must also be scaled down.

A second set of policies is designed to allow foreign corporations to exploit domestic resources and freely transfer their profits abroad.

• Competitive Exchange Rate: Ensures that foreigners can easily move money into, and out of, the country. This caused the East Asian Crisis, when foreigners moved huge amounts of money out of these countries. This should be prohibited, but that would hurt foreign interests.
• Removal of Barriers to Foreign Investment: Permits foreigners to invest in domestic economy.
• Financial Reforms: Financial markets should enable easy inflow and outflow of foreign capital.
• Trade Liberalisation: It should be easy to move goods in and out of the country.
• Rule of Law: Property Rights: Foreign capital should be protected against seizure by the government, especially when they engage in activities harmful to domestic interests.

While none of the Washington Consensus policies help to promote domestic growth, they all help to generate and protect profits of foreign corporations.  So there is no surprise that implementation of these policies around the globe in the 1990’s was a complete failure, in terms of promoting growth. Harvard Economist Dani Rodrik has documented this failure in his article: Goodbye Washington Consensus, Hello Washington Confusion.  The World Bank itself produced a report which concludes that these policies were implemented around the globe in the 1990’s, but did not produce any positive results. Similarly, the author of Washington Consensus, John Williamson, also admitted this failure in “The Strange History of the Washington Consensus”. But, instead of rejecting Washington Consensus, he argued that these policies needed to be supplemented with an ADDITIONAL ten points to be effective!

Despite experienced failure of Washington Consensus, economic pundits around the globe CONTINUE to recommend these policies, as solution to our economic problems. Why? Because economic theories taught in universities around the globe blindfold us, and prevent us from seeing the truth. Active efforts are made to DECEIVE us about the path to economic independence. One important evidence for this is provided by the World Bank book on The East Asian Miracle. The book opens by saying that these countries created miraculous growth. They violated EVERY rule of the Washington Consensus, and defied all policy recommendations made by World Bank and IMF. The goal of the World Bank book is to explain why other governments SHOULD NOT follow their example!! The book tries to explain that their success occurred DESPITE their violation of free market liberalism, and not BECAUSE of it. Despite clear failure of Washington Consensus policies around the globe, and also the miraculous success of countries which defied the Washington Consensus, the effort continues to sell us policies against our national interests. These efforts have been quite successful – the vast majority of public debate and discussion about the current Economic Crisis continues to rely on the Washington Consensus views, as the solutions to our problems.  

We can conclude this part 2 by summarizing the lessons so far. We cannot pursue independent economic policies required for success and growth, because we are still colonized: White Colonizers have been replaced by Brown Bureaucrats, trained in exploitation by the British. The mechanism of this colonization is two pronged. The rich and powerful elite receive massive amounts of foreign aid to help them retain power. The intellectuals of the country, the brains which could recognize this and revolt, are lobotomized into accepting false economic theories. Thus we pursue policies which enable foreign corporations to exploit local resources, make massive profits, and repatriate them, while preventing development of domestic industries.  

Stepping outside the framework of the talk, we can draw some Meta-Conclusions which help us understand the bigger picture. It is crucial to realize that we cannot understand Economic Theories outside of their historical context. Stripping the historical context is essential to the deception. History is not mentioned in standard economic theory, depriving students and teachers of the ability to understand the historical roots of our problems.

Similarly, economics cannot be understood without understanding politics and power. This has been most clearly recognized by Karl Marx and his modern followers. However, courses which mention Marxist theories are not part of university syllabi anywhere in Pakistan, and more generally around the globe. Michel Foucault’s philosophy that Power=Knowledge is most strongly reflected in the discipline of Economics. The theories we learn are designed to protect the interests of the powerful – See “Why Economists Persist in Using False Theories?”.  Class Struggle – the conflicting interests of the masses, versus the interests of the rich and powerful – has been a central driver of developments in both economic policies, and of economic theories. However, this is never mentioned in economics textbooks, making students and teachers blind to the real problems, and unable to see the simple solutions.

End of Part 2: Previous (Part 1: Current Crisis in Pakistan: Easy Solutions Blocked by Power). Next (Part 3: Decolonization: Required for Solutions to Crisis)

{bit.ly/AZcecp1} The original Urdu talk on “Current Economic Crisis in Pakistan & Solutions (An Islamic Perspective) was given at COMSATS, Lahore on Monday 10th Apr 2023. [ Urdu Video :: Urdu Writeup :: English Slides ]. For a collection of previous article on this topic, see: Economic Crisis in Pakistan: Analysis and Solutions.

Enormous interest in the topic has generated a lot of demand for this talk, which provides a unique perspective on the issue, and offers out-of-the-box solutions. Accordingly, I am redoing the talk in English, broken up into smaller parts. This is part 1 of the English talk, which explains that the root cause of the crisis is easy to diagnose, and the solutions are easy to find. But these solutions cannot be implemented within current political structure. The later parts of the talk will discuss what we can do working against these power configurations, or alternatively, working around them, without engaging in power struggles.  

Self-Introduction:

PIDE is the official think-tank of Government of Pakistan. My job as VC PIDE was to provide research-based advice to Planning Commission and other government bodies. I was also a member of many other high level Government committees. For Five Years, we researched, analyzed, and presented policy suggestions in many different areas to many different Ministries. To my knowledge, not ONE of these policy suggestions was implemented. I have explained the reasons for this in Impact of Colonial Heritage on Economic Policy in Pakistan 

Based on my experience, no one in halls of power listens to policy advice! Today, because Pakistan is facing a severe economic crisis, everywhere you look, people are analyzing, diagnosing, and offering solutions to our economic crises.  Should we add to the noise? Is it POSSIBLE to take effective steps – or is it only possible to make noise? Are we battling windmills, and ignoring the real frontiers for action? Is there something which can actually be done? Or are all policy reform proposal unimplementable, like the one about belling the cat made by the mice?

In this talk, I will explain that there are things we can do, but they are very different from the standard policy proposals being discussed everywhere.

Insights from Karl Marx:

One of the insights from Karl Marx’s ideology is that capitalism exploits labor not by force, but by educating labor to believe in the necessity of its exploitation. Similarly, colonization extracts massive amounts of resources from colonies by making them believe in false economic theories. Jason Hickel in “Aid in Reverse: How Poor Countries Develop Rich Countries” writes that rich countries invested USD 1.3 trillion in poor countries but received USD 3.3 trillion in interest and other payments. Why do former colonies use economic policies which permit our exploitation to such a great extent? A part of the answer is that we have absorbed false economic theories, which keep us occupied with red-herrings, while being oblivious to our real problems, and blind to the solutions.  

As I have said earlier, there is not much point in discussing policy proposals for resolving our current economic crisis, because no one will listen to them. However, before proceeding to deeper discussion, let me just put down the simple and obvious solutions to the current crisis. If we approach them with fresh minds, not clouded by complex and confusing economic theories, the problems we face in Pakistan are evident, and the solutions are also clear. For more details about the sketch given below, see “Debt-Trap and Self-Reliance“

Last year, our imports cost us USD 60 billion and exports earned USD 30 billion, forcing us to borrow USD 30 billion. When we borrow, lenders dictate terms and force us to follow economic policies ensuring our economic enslavement. The lenders are interested in keeping us enslaved, and will not allow implementation of good policies.  The first step to any solution must be to figure out how can we get out the debt-trap, so that we are free to implement good economic policies.

Again, the solution to this is simple. To avoid having to borrow, we must either increase exports or decrease imports. Throughout the globe, economists are advising “export promotion” as the right strategy. Policy makers in Pakistan have focused on export promotion for decades, without any success. Actually, this is the wrong policy. Throughout history, development has been achieved only by “import substitution”, or decreasing imports. This involves learning to manufacture, so that we do not need to import from abroad. Export promotion requires learning how to cater to foreign demands in very difficult foreign markets. Import substitution is based on catering to domestic demand. Using demand generated by our masses for cheap basic goods of low quality is the first step towards industrialization. This strategy has been used successfully by Japan, China, and the East Asian Tigers. Catering to domestic demand would lead to prosperity of the masses, and hence also to the prosperity of the nation.

It is almost obvious that we would do much better if we started producing local goods to cater to domestic demand, rather than export quality goods for foreign demand. So why is this import-substitution option never discussed by policy makers? The reasons have to do with politics and power, and these are not discussed in any of the economic textbooks. Poor countries export agricultural products and import industrial goods. As a result, food is more expensive for the poor, and industrial goods are cheaper for the rich. We sell the food of our poor people to pay for the comforts of the rich.

If we could overcome these political obstacles to recognizing and implementing good economic policies, what should we do? Our burning need is reduce our dependency on imports, so that we do not need to borrow USD. The bulk of our imports are energy and agricultural products. In the short run, we should import energy from Iran and boost agricultural production by eliminating the agricultural mafia. In the long run, we need to develop domestic energy sources and increase agricultural yields, which are the lowest in the region. Creating barriers to cheap imports will allow the development of domestic capabilities.

So, in conclusion, solutions to our current problems are easy. However, as I will explain in greater detail later, these solutions cannot be implemented due to opposition from the domestic power structure and global capitalism. So, instead of finding good economic policies, we must turn our attention to a different problem: What is the source of political obstacles to pursuing good economic policies, and can we overcome these obstacles? Alternatively, is it possible to take steps forward, without overcoming these political barriers? In the remainder of the talk, we will discuss these issues.

End of Part 1. Part 2: False Economics Blinds Us to Solutions

{bit.ly/AZrgt} This is Lecture 6 of A New Approach to Islamic Economics. For the lecture slides, previous lectures, and more information about the course, see Drivers of Social Change. The video of the ZOOM lecture is followed by a brief summary.

One of the deep insights of Karl Polany’s Great Transformation is that the capitalist economic system requires a market society, which makes markets central to our lives, and subordinates traditional social institutions. Markets exploit all planetary resources for the pursuit of wealth, and are on the verge of destroying the planet as a habitat for humans and other plants and animals. Many solutions are being sought within the market framework, but this seems to be an impossible task. Instead, in this essay, we will analyze how a market society works, and how we can disrupt this and attempt to reverse the Great Transformation.

A society is defined by a network of relationships, and assigns roles and responsibilities to all members. In a traditional society, members do not need markets for basic needs; these are provided by social networks. The concept of the society as a single body ensures social responsibility – the society must collectively provide for all members. A market society must break or weaken these networks, so that a labor force can be created – people willing to sell their lives for money, so that they can buy essential needs from the market. Natural social tendencies to help those in need must be reduced or suppressed so that the baker does not give bread to the beggars in need of it; otherwise, the motivation to labor would be diminished.

In terms of understanding how capitalism shapes society, the labor market is the key. See Boonjubun and Zaman: How Theories Shape, and are Shaped by History for a detailed discussion of how the labor market came into existence, based on Polanyi’s analysis. Briefly, a labor market makes it necessary for the vast majority to put up their lives for sale. This automatically ensures that money is prized as the most valuable possession – it can be used to buy human lives. It also leads to setting the value of human lives in terms of the money they can fetch in the labor market. This has far reaching consequences, ramifying into all dimensions of society. We will discuss a few of relevance to our lecture.

Market societies came into existence as a consequence of the industrial revolution, which created the possible of massive excess production, far beyond the needs of the entire society. For our exposition, it will be useful to separate goods produced into two types N(eeds) and W(ants). As per Islamic principles, we define needs generously to include comforts and beautification of life, but exclude excess and wasteful consumption. A very precise delineation is not needed for our discussion, and we may think of W-goods as positional goods, which are not of intrinsic value, but are valued for social status. In these terms, market societies produce W-goods far in excess of N-goods. Accommodating this excess requires a complete reconfiguration of traditional societies, which prize self-sufficiency and simplicity in life-styles. This creates the central problem a market society must solve: how to sell massive amounts of W-goods which no one wants in a traditional society? This is closely related to the problem of Aggregate Demand, which is central in Keynesian economics, but our treatment will be very different from Keynesian.

In order to sustain the production of W-goods, demand for these goods must be manufactured along with the goods themselves. Demand for W-goods among laborers is created by advertising, which ties social status to possession of these goods. This creates a vicious cycle at the heart of capitalism. Laborers desire W-goods. They labor to earn wages required to buy the W-goods. Their labor produces the W-goods, which capitalists sell at profit to the laborers. All of this production is a complete waste of time and energy, because if laborers did not desire W-goods (which are of no intrinsic value), they would not need to labor for them. Without labor, these goods would not be produced, and the entire society would be much better off.

Islamic teachings provide us with a powerful antidote to positional goods. The Quran tells us to eat, drink, enjoy comforts, beautify our lives, but to avoid wasteful and excess consumption. Working to acquire money for our needs and comforts (N-goods) is permitted and encouraged, but pursuit of idle-desires (W-goods) is prohibited. Prohibition of envy leads to a prohibition of conspicuous consumption, at the heart of a capitalist economy. Aggregate Demand in an Islamic Economy would be substantially lower than that in a Capitalist Economy. This would save substantial time and energy, since positional goods (or conspicuous consumption) is a pure negative externality — complete waste of collective efforts. What would one do with time saved from laboring to produce waste, in order to earn money to buy waste? One possibility is to invest this time and energy in industrialization – heavy investments in future productive capacity. This possibility was pursued by Russia and China, behind the iron curtain, and the bamboo curtain. The curtains were necessary to shield people from the desire for W-goods, generated by Western media as an essential ingredient of capitalism. By saving this time and labor, both countries were able to industrialize, unlike all other countries under influence of capitalism. Capitalism seeks to destroy economies it cannot subordinate to exploitation, so an important component of the industrialization process in Russia and China was advanced weaponry and defensive capabilities.

The question under discussion is: how can we transition from a market society to an Islamic society? Thinking of a market society as a network of social relationships, the first step would be to weaken our attachments to our market roles as laborers and consumers. Lowering the demand for W-goods would also reduce our need to labor, and thus our engagement with market society. Lowering this demand would require using internal motivations against pursuit of idle desires from Islamic sources, and also external protection from Western media which generate this demand – some form of iron or bamboo curtain. Creating an Islamic society would require building another network of social relationships, based on Islamic principles, to replace the market relationships.

As we lower our attachment to, and our engagement with, market societies, we must also redefine our identities, and our goals in life. A market economy is designed to turn us into human resources. Our identities are defined by our careers, or our place in the market economy. Our sense of self-worth is created by our salaries. Our education is designed to turn us into interchangeable and standardized parts within the capitalist machine for production of wealth. Recognizing these chains, which bind us to capitalism, helps in the process of removing them (see: Learn Who You Are!). We must learn to become human beings, instead of human resources. Our identity as a Muslim, a part of the Ummah, and a follower of the Prophet Muhammad SAW, must take precedence over our market careers. We must set our sights on the success of the Akhira instead of worldly success. We must work on building the network of social relationship which are central to Islam and strongly emphasized in the Quran and the Hadeeth.

Market societies work hard on anonymizing us. Stripping us of our connections to family, society, and history, in the name of individualism and authenticity, creates the raw materials which are ideal fodder for the capitalist machine. Families have already been destroyed in the West, where more than 50% of the children are born to single mothers. They are under severe attack in Islamic countries, as Hollywood glamorizes pursuit of freedom and pleasure, and defiance of social norms and responsibilities. Protecting and strengthening families in the Islamic world must be of the highest priority in our efforts to build an Islamic society. Unfortunately, this front is not even on the radar for most Islamic reform groups. The family is the nucleus upon which larger communities are built. We must build our relationships with neighbors, kinfolks, fellow workers, and any other kind of social circles to which we belong. The Islamic source materials are full of encouragement to build such relationships, as well as strategies for doing so. “The believer loves, and is loved. There is no good in someone who is not loved.”

One of the key insights of this lecture is that the driver of change must be the community, and not the nation-state. We must build communities, link them internationally, and use them to create the desired change. This is actually aligned with the historical experience of Islamic societies and also the theoretical framework furnished by our intellectual traditions, based on the Quran and Sunnah. In Western social theory, communities dropped out of the picture. In a secular society, all individuals have their own religions, there are no communities with collective goals, and the only possibility for collective action occurs at the national level. Hegel theorized that morality is created by the nation, because it is the only entity capable of creating the consensus upon which secular morality is based. Absorption of Western theories through colonization and education has led our reformists and intellectual to focus on the government as the only means of creating social change. While there is no doubt that if we could control the government the job of creating social change would be much easier, this is a heavily contested arena. Control of governments is essential to capitalism, and attempts to wrest power at this level would be, and have been, resisted with all the power capitalism can muster. Therefore, we must work on a different level, where our efforts are more likely to bring fruit. Also, building of communities is strongly aligned with the message of the Quran. The lecture describes some specific strategies we can use to build local communities, and to link them globally.

LINKS: This is lecture 6 of an ongoing course on A New Approach to Islamic Economics. The next live lecture will be on Sunday 7th May, on “Needs, Wants, and Scarcity: East and West”. Complete course materials are available from the course website: Islamic Economics 2023. You can also register of the online course on the Al-Nafi Platform, for complete access to all course materials in an organized form. To join our weekly mailing list for Islamic Economics, sign up at: http://bit.ly/AZIEML

Three students from Darul Qasim (Chicago) are taking my ongoing online course on A New Approach to Islamic Economics. Since my approach is in conflict with mainstream views, not just among economists, but also among Islamic Economists, I asked them to voice any deeper questions, or fundamental criticisms, that they had over the material that has been covered so far (see course website Islamic Economics 2023 for access to all the lectures; you can also take the free online course on the Al-Nafi Platform). One of the students responded as follows:

I have found your writing to be clear and logical, but at first I was very confused mainly due to two obstacles. The first is that your ideas and claims are very broad, and so encompass many sub-discussions with their own arguments and evidence. I have been reading many of your articles and posts and found that, for the most part, they clarify what is mentioned in the course (though there is no organization and they are scattered across multiple sites, so I have only been able to find them through clicking on links in other articles). Secondly, the practical dimensions of your thought were unclear to me until our last conversation, and further reading about your promotion of MMT, universal jobs guarantees, de-growth, protectionism, etc, along with the focus on character and community development prior to politics. All of this helps to tie the ideas into a holistic picture.

I still have many questions and feel that each of your broad claims requires lengthy discussion and debate, but I hope there will be more elaboration later in the course, along with the articles I have yet to read. I can agree with much of your epistemic and ethical critique of Western thought and society, but at this point, these are the topics I am most curious to discuss further:

Q1. How does fiqh and the historical practice of Muslim states/communities relate to the economic policies you promote?

Q2. Is your vision practical, and would it in fact be beneficial?

Q3. How do mainstream economists respond to these critiques?

There are currently around 1350 people who have signed up for this course, and my guess is that many of them would have similar questions, so I am posting my answers to the three questions below:

A1: Overall, I have come to the understanding that Social Science is the religion which arose to replace Christianity in EuropeA. Prior to SS, there were the scholastics, who explained how to organize society along Biblical lines – that is Christian Fiqh. SS rejected the scholastics approach and developed secular modernity, which is the current religion of the West. It teaches us how to organize society. However, our own Islamic Fiqh explains how to organize an Islamic society. So both Fiqh and our own historical experience should provide us with the foundations for how to build society today. Those who have taken this view and attempted to apply it to our modern societies have failed because of their lack of sufficient understanding of modern society. An example is Islamic Banking. As a result, a group of Muslims have rejected this approach, claiming that our Fiqh is obsolete and outdated, and we need to go to Maqasid al Sharia and re-invent Fiqh from scratch. It is true that if we do Qiyas on modern money and apply analogies to classical period of Islamic Civilization we will fail, because it will be Qiya Ma’al Fariq – modern money is genuinely new, never before existed in human civilization, so we need deep Ijtihad to get the fatawa — but we have the required resources to be able do so. Unfortunately, it has taken me a lifetime of training in modern Economics to arrive at this understanding. Similarly, the required expertise in Fiqh for the kind of Ijtihad we need requires a lifetime of training in Fiqh, and no one yet has had the two lifetimes required to do the work which is needed. But such people are coming up – you students may be among them.

A2: As far as practical and beneficial is concerned, the specific details of what we need to do have been sketched in my most recent lecture, see: L6: Drivers of Social Change. In particular, secular modern thought led to the rise of individualism – if everyone has their own religion, then there is no room for collective action, except at the level of the government, via democracy. This means that “communities” drop out of the picture. Having absorbed this analysis of society, reinforced by Hegelian views on the state as the creator of morality – our own intellectuals have sought to strive for social change via the government. But as Wael Hallaq has rightly pointed out in the Impossible State, the nation-state is inherently un-Islamic and one cannot arrive at Islamic results via un-Islamic means. So the appropriate level of action emerges at the community level, and does not really engage with the government and institutional structure of market societies, except to the extent required by pragmatic necessities. In particular, we do not seek to use capitalist institutions for Islamic ends (like Islamic Banks); rather we need to build Islamic institutions to replace them.

A3: Mainstream economists live in a dream-world. When I was developing my critiques of economics, very early in my journey, I asked some of my professors at Stanford about some of the questions which had emerged from a study of history which showed that some of the basic theories which we had been taught are wrong. They casually dismissed the historical evidence, which they did not know, because they were sure of their own theories, developed axiomatically and protected from all exposure to reality. I recommend two of my posts in this context: The Education of An Economist which describes my own experiences, and a recent post which has now been published in one of the leading heterodox economics journals: Why Economists Persist in Using False Theories

A4: A deeper explanation of the root problem in (A3) above comes from an understanding of Western philosophy. The relevant angle here is that the axiomatic method was developed to protect Trinitarian Christianity – some parts of the knowledge base (axioms) are taken as being outside the domain of question, discussion, debate, and argument. Economic theory is developed on the same axiomatic basis. This axiomatic approach, when applied to protect bad theories from scrutiny, is very harmful and unnatural to development of knowledge. This (axiomatic approach) was taken as the received view, the dominant accepted theory about how science works until around the 1970’s in Western philosophy at which point it was rejected due to too many strong objections. However, that led to collapse of the standard view of science but nothing has emerged to replace it, resulting in massive confusion about “What is This Thing Called Science?” (Chalmers). Meanwhile, modern economic theory was explicitly built on the basis of the received view, and continues to chug along merrily, oblivious to the fact that the philosophical foundations on which it was built have been destroyed.