{bit.ly/na2ie41} This is section 4.1 of Chapter 4: How Capitalism Shapes Our Minds and Hearts, or A New Approach to Islamic Economics; it explains the key methodological differences between our Islamic approach and the conventional Eurcoentric approach to social science. For the previous Chapter, see Gratitude, Contentment, and Trust

The approach to study of economics adopted in this course is radically different from that of conventional courses around the globe. Our perspective can be labeled as “Uloom-ul-Umran”, which is the study of how societies change over time. We will follow the methodology first created by Ibn-e-Khaldun for this purpose. It is historical and qualitative, as opposed to mathematical and quantitative.

For more information, see: Uloom-ul-Umran: An Islamic Approach to Western Social Sciences – http://bit.ly/AZUUU  We will describe it greater detail later, after first describing Western methodology for economics.

Battle of Methodologies:

A battle of methodologies took place in Europe, where this natural historical and qualitative methodology was replaced by a quantitative and mathematical methodology which currently dominates. For more details see: Method or Madness? http://bit.ly/WEAmom BRIEFLY: A century of religious wars led to rejection of religion as a basis for organizing society. Social Science emerged as an alternative. Rejection of religion led to its replacement by “science” as the sole valid source of knowledge. The scientific method was to be applied to the study of human society in “social science”.

Consequence of “scientific” approach: 

Science is study of external world. Objective: Factual knowledge was prioritized. Internal Subjective experiences were no longer regarded as knowledge. Our internal experience is “subjective”; it cannot be studied scientifically. This was discarded by economists using scientific method. The  unobservable utility of consumption (an internal feeling of pleasure) was replaced by the observable choices we make. Christian morality was replaced by rationality. Rationality Axioms were used to define behavior, in a way  not related to our internal subjective experience of the world.

These axioms are built on rejection of God, Afterlife, Judgement Day. It is rational to believe in the unseen. They depict human behavior to be maximization of pleasure. Also, humans are animals, engaged in cut-throat competition, governed only by survival of the fittest.

The Alternative: An Islamic Methodology

Reject Axiomatic Behavior theory: This is wrong both normatively and empirically. See:The Strong Conflict Between Human Behavior and Economic Theory: http://bit.ly/AZconflict  Start with Islamic Theory of Human Behavior. Great Strides have been made in Islamic Psychology. For a recent summary, see: Abdallah Rothman: Developing a Model of Islamic Psychology and Psychotherapy Islamic Theology and Contemporary Understandings of Psychology – Routledge 2021.

The model of human behavior, developed by articulating the conceptual frameworks within the Islamic intellectual heritage, can be diagrammed as follows:

Concluding Remarks:

A theory of human behavior is FUNDAMENTAL to construction of social sciences. Excluding subjective human experience as “unscientific” leads to a dramatically wrong picture of human behavior. Islamic intellectual heritage offers a rich and complex understanding of human behavior, which can be used to create an alternative theory of economics, and also rebuild the social sciences. The Key Difference: Modern Economics is theory of the spiritually stunted Nafs-e-Ammara; Islam’s Gift is an Economy of Spiritual Progress. See: http://bit.ly/AZgift

LINKS:

• Next Section 4.2 Methodologies for Studying Social Change 
• Online Course: A New Approach to Islamic Economics: http://bit.ly/IEalnafi
• Course Description: http://bit.ly/na2ie
• Weekly Mailing List on Islamic Economics: http://bit.ly/AZIEML

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{bit.ly/AZfoie2} In the first part of this talk, we explained that one of the biggest obstacles to creating an Islamic Economic system is the mythologies created by capitalist economies to justify oppression of the poor and wealth inequality. In addition, there is the myth that capitalism is more-or-less compatible with Islam. It is only after rejecting both that it becomes possible to think clearly about what an Islamic economics system would look like. The video below is a follow-up lecture to this talk, which was delivered (in URDU) at Karachi University on Feb 23rd. The video is followed by a writeup of the 2nd Part of the original English lecture. The slides of the original lecture provide an outline of the lecture:  Slides for both parts (bit.ly/SSFOIE).

WHAT CAN WE DO?

 What can we actually do now? So I have listed some of the obstacles in the path of creating an Islamic economic system, but there are many more which I have not listed. We have to understand that whatever obstacles we face today are far less than the obstacles faced by our Prophet Muhammad (PBUH). The hostile environment that he faced was much worse than what we face today. But the teachings of Islam transformed ignorant and backward Bedouin into leaders of the world created a civilization which enlightened the world for more than 1000 years. The final message of God to humanity is complete and perfect guidance for all times. It is just as revolutionary today as it was 14^th century (see Islamic Knowledge: Still Revolutionary after 1440 Years!).

If we take this as an axiom of faith, we do not have to do very complicated calculations and sophisticated analyses to learn what to do. We have the solution in front of us, but we’re just not looking at it. Today when we have economic problem, we call in the experts from Harvard. Similarly, in all dimensions of our lives, we’re looking to the western books for solutions. When I was VC of PIDE, we had a course on Business ethics. I assigned the course to a teacher who was a bearded man and a very sincere pious Muslim. I looked at his course outline and he was basically teaching business ethics from a western text. Even on our own home grounds of ethics, we are borrowing from the West, instead of looking for solutions from our own intellectual heritage.

DECOLONIZING OUR MIND

To start the process of decolonizing our mind. We need to follow Iqbal who says that

My eyes were not dazzled by the brilliance of Western knowledge – they were protected by the dust of Madina and Najaf (two Islamic centers of learning).

We all have basically prostrated to the gods of Western Knowledge and we need to lift our eyes and look at God and his book for his guidance. This requires decolonizing our minds. What is decolonization? The most fundamental is that the colonized mind believes that the most important knowledge that exists today was produced by the West over the past three centuries: Physics Chemistry Biology Political Science Economics Mathematics. This colonization is automatically created by western education where we study for four years in a university and these are all the things that are taught. No mention is made of the Quran and Hadith, and the Islamic intellectual tradition, so the student can only conclude that these are irrelevant to our modern lives.

Anybody who gets a bachelors or even high school diploma in western education — which is everywhere in the muslim world — you end up with the automatic idea that knowledge is produced by the West and the Quran and Hadith are irrelevant for the modern world. Part of this knowledge is economic knowledge it tells us how to conduct our economic affairs. Modern economics seems entirely unrelated to anything produced by the Islamic intellectual tradition, leading to the automatic conclusion that this tradition has nothing to say about our economic affairs today.

WHAT IS THE GOAL OF OUR LIVES?

If you want to break the spell of western knowledge we have to start with the fundamentals and ask what is the goal of our lives? If you look at economics texts they say that the goal of our life is to maximize pleasure. Why? If you reject God, Afterlife then this is the natural conclusion. In contrast, Islam teaches us that real success is the day of judgment. Economic theory tells us that society should try to maximize wealth because its goal is this world. But Islam tells us life of this world is pursuit of an illusion (for confirmation, see: The Coca-Cola Theory of Happiness). Allah SWT created us to see who can do the best of deeds in adverse circumstances. Another significant difference is that economic theory  is outcome oriented – it says that if you eat something then you get pleasure. The process by which the outcome came about doesn’t matter. Allah SWT say this world is meant only for struggle while the reward are in the hereafter. The fact that our circumstances are adverse is not a serious concern to us because we are here only to struggle and to show Allah T’aala what we can do. The outcomes that rewards are waiting for us in the hereafter.  So Islam is strongly process oriented, in contrast to economics, which is outcome oriented.

INTERNAL GOALS: SPIRITUAL PROGRESS

We start the process of change by setting our internal goals and  spiritual progress instead of making money.  Many Muslim students come to ask for advice on which career should they pursue what discipline should they study economics, computer science etc. To make the most amount of money.  They have already been indoctrinated into believing the purpose of life is to make money the purpose of life is really that we are given Nafs e Ammara is in fact the exact description of the homo-economics which is the goal which, which is the rational human being of economic theory. Our goal is to go from Nafs e Ammara to Nafs lawwama to Nafs e Mutmainna. And discussion of how this works is given in my paper so this is actually what we call the work of the night. See Islam’s Gift: An Economy of Spiritual Progress

EXTERNAL GOALS: COMMUNITY BUILDING

There are also external goals. Economic theory and social science mindset tells us that the the government runs the society, so collective action is only possible through the government. Basically this is a misconception created in a secular society. European religious wars led to the idea of individual freedom, where everyone can pursue their own goals, and collective action is done by the government. The possibility that we can take collective action as a society was erased from the conceptual framework. This has not been the case in Islamic society. In Islamic society the driver of change is the community. Our target for action is the local community, the family, kin folks our neighborhood. The values are taught at the mothers’ lap, within families and within the larger circle of extended family, and within neighborhood communities. Strong families are central to the develop individuals and communities. Today the worship of self, which is being promoted all over the world by Hollywood and by social media this is damaging love, commitment, sacrifice and responsibility which is at the heart of the family we need to actively counter this because this poison is spilling into Islamic societies and it is having effects on our souls.

UNIQUE FEATURES OF ISLAM: NO MONASTICISM

As said that there is a need of putting the effort on our individual self and then there is the effort needed by community. Sometimes people get the wrong idea that one must go and sit in a cave for forty days and then can come out and work on the community.  If you work personally becoming a saint first, then this will never happen and so you will never be in the position to actually make change. So Islam actually does not teach us monasticism and this is a unique feature, that we work on our soul by struggling to change the community. The efforts of the night (on our selves) are complementary with the efforts of the day (on the Ummah), the two go together.

CREATING STRONG COMMUNITIES

Shaikh Abdul Hayy once said that the remembrance of Allah and prayers that is like the petrol for the car and the activity is like the driving of the car. So without any petrol you cannot drive but if you just keep filling petrol in the car and never drive it that’s also useless. You need to create spiritual energy by worship, and use the energy to struggle with transforming the world in the directions desired by Allah. So how can we create strong communities? This is one of the keys to Islamic revival. To support families, to prevent them from breaking up in this environment, which is toxic to family values. We have to especially support mothers, who have been emphasized heavily in Islam, because that’s the basic training ground for the society tomorrow. If all mothers ruined their children today our society will be gone tomorrow. In contrast if all mothers train their children well the society would be wonderful tomorrow. The men have the job of using the mosques to build neighborhood communities. Today we have lost this. The mosques are there but it is not acting to create the community. Today we go and pray in mosques for ten years but we are not aware of the name of the person sitting next to us even though we recognize them by face. So we have to work on creating good communications at the community level and using this information to transform the community.

COMMUNITY BANKS

So the community banks are the things that can be create without the government intervention. Basically one of the thing I am saying is that because of the secular mindset people are thinking that first we need to capture the government position then we can do anything this is not true there are many opportunities that are open at lesser and local levels. By thinking about, and working on, levels outside the reach of our capabilities, we lose the opportunities to create change in our communities, which is where the change process starts.

MULTILAYERED COMMUNITIES: UMMAH

The concept of nation was invented in Europe after the dissolution of the concept of a united society. In the religious era the society is United on the basis of religion. But after an artificial imagined community was created at the nation level. As Iqbal says “The greatest of the new gods of mankind is the Nation; the clothing that it wears is the coffin of religion”. Wael Hallaq has given the same message in a less poetic, and more articulate way; see The Impossible State. The nation state has created  enormous amount of bloodshed unparalleled in the history.

KEY TO PROSPERITY: COMMUNITY DRIVEN DEVELOPMENT

So instead of looking to the nation to change and to transform the world and instead of seeking to capture national government in order to bring about Islamic change we have to work with communities and create change at the community level.

PART 3: STATE LEVEL INTERVENTIONS

State level interventions — which is exactly contrary to what I have just said earlier – In the long-run we cannot use the nation state as a strategy for Islamization, but as a part of any transitional strategy, because nation states play such an important role today, we have to deal with them. We cannot ignore them and we cannot bypass them but we have to recognize what these things are these are creations of European politics. They are responsible for enormous amounts of bloodshed and violence all over the Islamic world Nation states were explicitly created as a part of the Divide and Rule strategy.  There is a very important book by Wael Hallaq which should be read by everyone: ‘The impossible state’ he says basically the fundamental foundational basis of the national state is contrary to Islam and cannot be reconciled with it. So the Islamist strategy that we want to capture state power to implement Islam cannot succeed because state itself is in conflict with Islamic ideas. Nonetheless, as I said you still have to deal with the state.  with the understanding that state is not a permanent solution this is part of a transitional strategy you have to deal with the state because they are so powerful but hopefully we will evolve beyond that stage and limitiation. Today, nation-states are dividing the Muslim ummah and so they are causing very great harm to us. With this warning we go into study how and what happens at the state level. So again we deal with economic myths and one of the most popular is that export promotion the path to development and economic growth also that the government must raise money by taxes and borrowing to finance its expenditure, banks do not create money, inflation is due to money creation all of these are totally false ideas.

LIBERATING TRUTHS

The truth is that path to development requires development of local productive capacities and if anyone wants to build an industry in Pakistan today we have to protect it from foreign competition first because it will naturally be weak and imperfect. Free trade which is recommended by economists benefits the strong economies and destroys the weak. See Free Trade and Economic Development.

THE DEBT TRAP

Today Pakistan is caught in a debt trap,  having exports of 30 billion and imports of 60 billion. So we need to borrow 30 billion USD to finance our imports. When we borrow, we become enslaved by the lenders. Lenders are happy to lend even if they know that this will never get repaid because they get power to control our  policies and using this control they can get enormous advantages — much more than the money they  lend us, and the money they lend is just paper. It cost them nothing to lend any amount of money.  Jason Hickel (Aid in Reverse: How Poor Countries Develop the Rich) has calculated that data was available for 2012 shows that two trillion dollars were sent by poor borrowing countries to rich lending countries and a large portion of this is in terms of interest rate so this interest based financial system is a tool for trapping the poor countries into eternal slavery.

THE WHY OF THE DEBT TRAP

Why we are in this debt trap? This is basically because of false policies recommended by economic theory. There was no significant trade deficit until large BOP deficits that started from 2003.  In 1995 Pakistan joined World Trade organization and started lowering the tariffs until they reach at this critical point of  15% and now they are around 8%  when our tariffs are low import come in heavily because imports are cheap and so there was a point at which we were importing oil seeds from Brazil. Pakistan is an agricultural country why it should be importing oil seeds from Brazil? Because both our duties and our for exchange policy made the dollar cheap and so basically this destroyed local industry — (see Taimur Rehman slides on Protectionism) . It is important to understand the history of free trade theory. It was invented by England after England acquired 50 year lead over Europe via the Industrial Revolution.  The European countries implemented free trade this created a recession in Europe and growth in UK. German economist Friedrich List invented the infant industry argument and he protected the German industry via trade barriers. Today WTO which enforces free trade on the weaker nations had brought great benefits to the rich countries and caused losses to the poor countries. Free Trade and low tarriffs ensure that the poor countries never develop their own industries to compete with the rich, and remain locked in dependency forever.

WHAT CAN BE DONE ABOUT DEBT-TRAP?

Pakistan is really caught in a big crunch now and so there is a short run solution which has to be political, medium term  solution can be to develop self sufficiency in energy and agriculture products. This can be achieve in 3-5 years. In the long run there is a need to develop local industry. Self reliance strategy is necessary. There is a drastic policy change in which we can go full Islamic and we can renounce the interest payments of foreign debt but this will have massive political implications (which can be managed there is a report of council of Islamic ideology on elimination of interest in 1980 which mentions this idea and provides a detailed step-by-step transition plan. It needs to be updated but the outlines are there.) Now in a short term transition to an interest free economy modern Islamic banks are the only available option; see A New Vision for Islamic Banks and Islamic Monetary Policy. But these revolutionary strategies are not currently feasible because of political constraints.

So, how else can we resolve the short-run burning problems facing the Pakistani economy? The main problem is actually Political. We have power struggles between the bureaucracy, politicians, army, and foreigners powers pursuing with their own agendas with huge amounts of money. So the solutions requires engineering a united front, defending Pakistan and at the same time protecting local industries from collapse, which is happening daily today. In the medium term we need to put all our efforts into creating energy and agricultural self-sufficiency. This will prevent us from needing so many imports, so we will not need to borrow dollars. Once we do not need to borrow money then we can craft our own economic policies. It is worth noting that we had industries in small mobile, electronics, large electronics telecommunications, aviation industry. Nearly all of these industries (except aviation, protected by the government) have collapsed due to competition free trade and other factors. This has caused massive damage to producers confidence. We need to understand that all of these magic tricks that we are trying to follow – coming from the Washington Consensus – lower corruption, better governance, lower tariffs, encourage free markets, privatize – all of these are nonsense and meaningless distractions, which prevent us from doing what is necessary. What we need to do is to develop local productive capacity, protect them from foreign competition, and stimulate them to grow into world-competitive industries. This can be done and there are a number of methods which have been used effectively in other countries.

Zero Inflation Required For Zero Interest

In the long run if you want to create an Islamic economy we have to eliminate inflation. Because if you want to have zero interest then you need to have zero inflation. The problem is that economists have no understanding of inflation; see Modern Money and Inflation. One way to prove this is to note that around the world that they have been unable to control inflation, despite their best efforts. There is a school of thought, not part of orthodox economics, known as Modern Monetary theory. MMT is the intellectual heir to Keynesian Economics. They have a clear understanding of inflation and they have a policy recommendation for zero interest and zero inflation economy. MMT’ers have the policy recommendations for how to create it. MMT gives us the framework for how we can create a zero interest economy. Of course, this is only one element of an Islamic Economic system. Another central  element of MMT is the Job Guarantee program, which ensures that anyone who wants to make productive contributions to society can get a job. This is also in line with Islamic ideas. For more detailed explanations, see MMT for Pakistan. So, how can we get from here to there? That is a difficult problem. What is the transition process? We can’t just destroy capitalism today and build on the ruins. We have to go smoothly, prevent major problems. Some aspects of this have been worked out and can be done, but the problem is the implementation stage. Who will create change? One has to look at the political and power aspects. There is no point in sketching a plan for transition if it cannot be followed. But some aspects which are worth mentioning. There are things which we can do without making a revolution in the government, and without actually changing very much. One of the key things that comes out of the recommendations of MMT  and also coincides with Islamic ideas is that the Islamic bank should have the motive of providing public service not the motive of maximizing profit – see A New Vision for Islamic Banks. If banks are motivated by performing public service, this doesn’t mean that they work for free. This means that everybody gets salaries everybody gets paid gets car and bank profits go into research – But the job of the bank is, instead of trying to make money for speculation on stocks and real estate, you put money into socially valuable products. There are many ways to do this, but the first thing is to change the hearts of people. To make public service more valuable and to make success in the hereafter more valuable then this worldly life. Islamic banks are supposed to be like that we have to make them live up to their name.

 SO WHAT CAN BE DONE ABOUT THE DEBT-TRAP?

There two specific suggestions: 1. Islamic banks can get into the business of providing training loans they can take people and finance them enable them to either run their own business or find jobs and they can finance them and then get repaid from the profits that they make. 2. A more ambitious version of this is life loans where every child born gets financial support that he needs until he becomes a productive member of the society and then he can repay this loan. MMT theory which is very much aligned with Islam not perfectly but sufficiently provides the theoretical framework about how we can operate in the modern world and how we can implement Islamic ideals. Islamic economics therefore is not just making interest rates to zero. It talks about the right to basic needs for all, provision of equal opportunities such as education so everyone who wants to contribute productively to society must be given the opportunity to do so.

{bit.ly/AZfoie1} Invited talk at The Revival Foundation, engaged in the ongoing struggles for Islamic Revival. The video contains the full talk. A written summary of part 1 follows the video. For a summary of Part 2, together with an Urdu discussion of both parts, see Foundations of Islamic Economics Part 2. See also: Slides for both parts (bit.ly/SSFOIE).

INTRODUCTION

The problems in creating an alternative to a capitalism have occurred because Muslim economists have accepted the capitalist economic framework uncritically. In fact, the dominant view among economist is that Islamic economics is just a variety of capitalism: with minor modifications to capitalism, one can get to Islamic economics. My recent book entitled “Islamic Economics: the Polar Opposite of Capitalist Economics” explains this in depth and detail. A shorter paper/blog post on Crisis in 2nd Generation Islamic Economics  provides a brief introduction to the issue, which is highly recommended as a background to reading this post.  The central problem we face in understanding the nature of Islamic Economics is the large number of myths about economics that we have swallowed as a part of our training (formal or informal) in modern economics (see: Why Do Economists Persist in Using False Theories?)

The Myths of Economics

In “The General Theory of Employment, Interest and Money” Keynes wrote that writing this book required the author to escape the grip of orthodox economics theory. Orthodox theory confidently predicted that the Great Depression of 1929 could not happen, just as leading modern economists confidently predicted that the Global Financial Crisis of 2007 could not happen – See Completing the Circle: From the Great Depression of 1929 to the Global Financial Crisis of 2007. The basic principles of Islamic economics are extremely simple and obvious. But the problem is that they now appear very difficult because we are trapped within the framework of wrong theories and these make it difficult to understand simple ideas.

Why So Many Myths in Economics?

Karl Marx pointed out long ago that capitalism works not by forcefully exploiting the laborers but by making the laborers to agree to their own exploitation. This is done by education. Economic theory teaches that everyone in the system earns their marginal product. This is actually a moral argument, concealed in a mathematical disguise. Once we understand a moral argument is being made, we can find many flaws in it. A lucid discussion is given in Chapter 8 of Hill and Myatt’s Anti-Textbook of Microeconomics. The argument assumes some implausible technical properties for the production function, and also assumes a competitive market, where both laborers and capitalists are so small that they have no power to affect prices and market outcomes. Neither of these assumptions hold in the real world. The main reason for this argument, and many others like this, is to provide a justification for the exploitation of labor, using a toxic morality, concealed within mathematical form – see Economic Theory of the Top 1%: Blindfolds Created by Economics.

THE BATTLE FOR THE CONTROL OF MONEY

Myths about how money works are central to the power exercised by high finance, which is cleverly concealed by economic theories. Economic text books say that banks do not create money. Economists believe that governments, not financiers, control the supply of money. Economists also say that supply of money is the main determinant of inflation. All of these three are false. The Bank of England in 2014 published a paper which says that the standard theories of money creation are wrong. In Western economies, money is mostly created by financial institutions. A common misconception is that the bank loan the money to the investors that the savers deposit in to the bank. In fact banks create new money which they lend. Also there is no money multiplier in the sense that the government cannot really control the amount of money in the economy.

Money Creation and Monetary Crises

Contrary to what textbooks teach, the function of banks is to create money, and their profits are tied to how much money they create. Excessive money creation by banks led to a real estate and stock market bubble which crashed, causing the Great Depression in 1929. After the Great Depression a series of strict regulations were passed such as Glass-Steagall and other acts were passed which prevented the banking sector to behave irresponsibly. That prevented banking crises for fifty years. And then in 1980s, Reagan-Thatcher era started, that initiated the deregulation of financial industry. This process was completed in 1999 and 2000 which repealed the Glass-Steagall and created the shadow banking industry and only after seven years the Global financial crisis followed on the same pattern as the Great Depression 1929. For more details, see Keynesian Revolution and the Monetarist Counter-Revolution

How Power Shapes Knowledge

Economic solutions to our current problem are very simple. They are intuitive, easy, to understand if someone hadn’t been brainwashed by economic theory. One can easily see what we need to do. But today the economist, policy makers, bureaucrats nobody is presenting these solutions or acting upon them. Why? Because wrong theories have trapped our mind and they lead us to wrong diagnosis and wrong solutions. Implementing the right theories is difficult because if implemented this will rearrange the power configurations. Basically, good economic policies would empower the masses but also take away the power from the power elites. So what hope is there? Since implementation will be extremely beneficial for the masses so if the right knowledge is given to the masses, they have the power to create the change. Economic myths are necessary because the physical power of the elites is not enough to control the masses. Replacing myths with truths would be revolutionary. See How Power Shapes Our Thoughts.

PARTIAL ISLAMIZATION?

The misconception that capitalism is more or less Islamic leads to false belief that minor modifications can lead to an Islamic economy. If we ban interest and add zakat on wealth, we can convert capitalism to Islam. Capitalism itself has evolved into financial capitalism since the Reagan-Thatcher era, and is heavily dependent on interest-based credit creation. Simply banning interest, or setting interest rates to zero, would cause the system to collapse. Instead, one needs to make a set of coordinated changes, with special emphasis on ensuring that inflation rate is zero. Modern Monetary Theory provides a framework within which these changes can be carried out. It is only after making many systematic changes that it becomes feasible to eliminate the interest, and make the system conform to Islamic law. See Islamic Monetary Policy. For a sequence of posts explaining how we can apply MMT to Pakistan, see MMT for Pakistan.

UNLEARNING MYTHS

In order to get to genuine solutions first there is a need to unlearn a lot of myths. Some of these will be discussed here. First, we need to learn to see through the moral framework underlying modern economics. This is difficult because it is concealed and unacknowledged. Economists themselves say that Economic Theory is a positive subject and science that observes and explain without any moral foundations. The problem is that Muslim s have been deceived by this argument and believe the same: that economics is value-free which is far from true. This is part of a bigger myth about social science.

Social science is just lessons about how to build a society which are extracted from the European historical experience. How to run economy, politics these are learnt from historical experiences. European had their experiences about building societies and they took lessons and created social science from them. But the problem is the use of word science, the word science is deceptive, because this represents the claim that European experiences are universally applicable. Because we are so impressed with the European physical science, we give social sciences the same level of respect as the physical sciences. Even though this is completely unjustified. Social science is not like the physical sciences at all.

Social science including economics teaches us how to build societies according to European patterns. These patterns are highly unsuitable for non-European societies. This is a major problem of Muslim societies around the world today. See The Puzzle of Western Social Science

THE TRUTH ABOUT SOCIAL SCIENCE

To understand the origins of social science, we need to look at European history. There was a century of devastating wars between Catholic and Protestants. Before this, social science was based on bible. There was a school of thought ‘the scholastics’ which had developed economics, politics and international relations etc. Due to a century of wars, Europeans realized that the social theory can not be based on Bible as it leads to constant warfare. So, they were forced to develop a theory of how to organize a “secular” society – without any religious basis. Rejection of Christianity led to the following foundational ideas, on which modern social science is built:

Man is just another animal and there is no morality except survival of the fittest. The world being a jungle working on the rule of cut-throat competition for survival. This basic worldview underlying all social sciences including economics. It is useful to think of Social Science as the religion which replaced Christianity in Europe. The failure of this social science is obvious from the results created by it:

What has it accomplished? if you look at the societies in Europe you have broken families everywhere more than 50% of children are born to single mothers and they grow up without the love and security of safe home environment. European society suffers from massive social problems because of this breakup of families. We have continuous wars for profits, massive wealth inequalities, and more than a billion people living below poverty, even though there is sufficient planetary resources to feed everyone. Perhaps the most important is the looming climate catastrophe. Search for profits by corporations has led to over-exploitation and pollution: the oceans are polluted the atmosphere is polluted. Climate scientists say that humanity will not be able to survive on this planet. This is all the effect of bad social science theories.See also “Rebuilding the Social Sciences on Islamic Foundations” (Part 1) and (Part 2).

FAILURE OF ECONOMICS

Among the social sciences, economics has also been a catastrophic failure. Economist dismissed many warnings about global financial crisis, with false confidence provided by theories which said that it could not happen. Lucas (Nobel laureate in economics) gave the presidential address in American economics association in 2003 saying that we have solved the problem of recession prevention. Four years later, he was proven wrong. Bernanke was the head of Federal Reserve Bank. He applied Friedman’s theories that Great Depression was caused by the failure of central bank to supply enough money.  Bernanke turn on the taps and the quantitative easing policies  that he followed injected the most or largest possible amount of money which has never been seen before in history but this could not prevent the global financial crisis, and they could not prevent the Great Recession which followed the Global Financial Crisis. The dominant economic theories about how the great depression and the global financial crisis happened are fundamentally wrong, They’re easily proven wrong (see Causes of GFC 2007: House of Debt). But the strange thing is that these theories continue to be used to guide policy around the world today.

DEEPER CAUSES FOR THE FAILURE OF ECONOMICS

So again instead of going to technical details we have to look at why that a theory is known to be wrong it continues to be used. To understand this you have to go deeper and explore why this is so. The reason for this is that economic theory supports existing power configurations. When Keynes first understood the major fraud that economists have perpetrated, he was able to see a way out of the depression. Keynesian theory createe full employment. This created prosperity for the masses but it also reduced the wealth share of the top 1% so counter revolution against this was plotted and executed. For more details, see Keynesian Revolution and the Monetarist Counter-Revolution. The counter-revolution against Keynesian theory was implemented in the Reagan-Thatcher Era, and today the monetarist (the Chicago school) theories dominate the world and the minds.

KEY POINT: ECONOMIC THEORY IS IDEOLOGY

The key point is that economic theory is an ideology and it is used to justify capitalism. Economic theory is basically the religion of worship of the Nafs (desire).  Economic theory start by saying that your rational behavior is to maximize pleasure in this world which is obviously just the same as worship of Nafs. If you trace it back, where did this idea come from. you will find Jeremy Bentham’s utilitarian philosophy. Jeremy Bentham explicitly rejected Christianity. He considered the question of “how do we build morals?” and ame to the conclusion that something which gives you pleasure is good, something which gives you pain is bad. Our problem is not that they constructed this theory. Obviously, after you reject God then you should maximize pleasure in this world. What else is there to do? But the mystery is why do Muslim teachers all over the world continue to teach this deadly philosophy and even justify it on the basis Qurān and Sunnah. For an alternative approach, see Islam’s Gift: An Economy of Spiritual Progress.

COLONIZATION IS THE CONQUEST OF MINDS

Muslims have accepted Western knowledge in conflict with Quranic teachings because of a defeated mindset which results from colonization. Colonization can be sustained only with the consent of the colonized. A handful of Englishmen )there was a maximum of 1000 people in the British bureaucracy) cannot rule over millions of Indians without their consent. How is this consent created? It is by education. The aim of colonial education is to create subordinate ruling class which is loyal to the English. This class will respect and admire the West and have contempt for their own culture religion and history. After the departure of the British, the ruling elites came from this class, trained to admire the West, and hate their heritage. They continued to treat the people as an inferior class meant to be exploited for revenues. The educational process, which sustains their power, remains exactly the same today as it was in colonial times. It creates exactly the same respect and admiration for the West, and for the English speaking elites, and contempt for our own culture, religion, and history. See The Conquest of Knowledge.

Impact of Colonial Heritage on Economic Policy in Pakistan

This colonial heritage has had a massive amount of impact on policies in Pakistan. I was head of PIDE and I was advising many ministers and ministries about what to do and I realized that advice is not very welcome because I was trying to give advice on how to bring prosperity to the nation but the ruling class only want prosperity for themselves, they don’t want prosperity from the masses. If you look at examples of radical change – how did China change? The basic driving force was Chairman Mao’s vision in which he called the nation to their ancient and glorious heritage. Once you inspire the hearts with a grand vision, then all sorts of manifestations occur. Mao united the nation on their ancient heritage. In Malaysia there were internal fighting between many different ethnic groups Mahathir called in the leaders of the groups and united them on a common policy and this was what led to progress. But in Pakistan and India the effects of the divide and rule strategy continue to divide Muslims and we have fights between Sunnis and Shias etc. All of these conflicts were deliberately created by the British: divide the Muslims in order to prevent Muslim from rising against them. Even the Hindu Muslim divide is also a creation of the British but you see how it’s deadly effects today. See Divide and Rule.

SUMMARY AND RECAP

This is the end of part one. The steps for islamization of economy are natural and intuitive. Modern economic theory is the religion of capitalist societies but this religion actively prevents us from understanding the real issues facing the economy and prevent solutions so if you want to learn Islamic Economics you have to unlearn modern economics. For the second part, see Foundations of Islamic Economics Part 2 – This also contains a link to an extended Urdu discussion of the original English talk, which took place at Karachi University in February.

{bit.ly/AZnaie1} Modern Economics offers us “homo economicus” as a perfect model of rational behavior, even though he is cold, calculating, callous, and cruel. Trained to think of this as rationality, it is little wonder that economists promote policies which are destroying the planet. In our New Approach to Islamic Economics, we offer a radically different set of ideals, based on Islamic principles. The first lecture, outlined in detail below, was about the normative ideals of gratitude, contentment, and trust – these are far better for our psychological welfare than pursuing the rationality of the psychopathic homo economicus, recommended by economists. A brief video provides an overview of the lecture, which is followed by a detailed outline.

The original ZOOM lecture 1 can be viewed at: http://bit.ly/YTnaie1 This lecture has been broken down into shorter pieces, with writeups for each segment, which are listed below:

A: Gratitude: Being grateful to God for all the blessings we have been given is the key to enjoyment of life, and also of getting more from Allah.

B: Contentment: Utility, Pleasure, or Satisfaction does not come from pursuing our idle desires (as economists teach us to do). Rather, it comes from cultivating the feeling of contentment and satisfaction over what we already have.

C: Trust: Life faces us with many trials and challenges. Trust in God creates the serenity that allows us to face these difficulties with equanimity.

D: Methodology: (This is not part of the original ZOOM lecture; but was added in later). The idea that science is the only valid source of knowledge was responsible for the creation of the modern social sciences in the early 20th Century. As the word “science” indicates, social science was to apply the scientific method to the study of human societies. This is actually a hopeless project, doomed to failure from the outset, because human societies and human being are not subject to the mathematical laws of planetary motion. This post discusses some of the central myths regarding science and scientific methodology which led to the creation of Western social science.

E: Economics: Modern Economics makes the claim to be positive, and also that economic theory should be studied in a “positive” fashion. Both of these claims are false. Modern Economics is normative, merely substituting norms of rationality for norms of Christian morality. It fails to be descriptive. Indeed, to describe human behavior, we must take norms into account because human beings are driven by normative ideals. So the idea that we can take a “positive” approach to the study of economics is fundamentally wrong.

F: Why Do Economists Persist in Using False Theories? If economic theories are false, and this is easily demonstrable, why do economists keep on using these theories, despite accumulating empirical evidence against them? This segment of the lecture explains how economic theories support the powerful and the wealthy by concealed moral arguments which justify their power and wealth.

G: Uloom-ul-Umran: The final segment of the lecture proposes an alternative methodology for the study of Islamic Economics, based on the approach of Ibn Khaldun. Ibn Khaldun studies the process of social change, as driven by collective goals of different social groups within society. This requires looking at the goals (normative ideals), the ground realities (descriptive or positive part), and strategies required for achieving our goals (transformative). This three part methodology is essential to the study of human societies, and differs radically from any methodology for the study of inanimate objects as in physical science.

LINKS TO RELATED MATERIALS:

For the free, ongoing, online course on A New Approach to Islamic Economics, tegister on the Al-Nafi Platform: http://bit.ly/IEalnafi For weekly mailing list about Islamic Economics: http://bit.ly/AZIEML For more details about course: http://bit.ly/na2ie The course consists of live Lectures on every first Sunday of the month, but additional materials and supplements are available on the Al-Nafi Platform. Videos of the first two live lectures are linked below:

• 1^st Lecture: Gratitude, Contentment and Trust – Complete, unedited video of live ZOOM lecture: http://YTnaie1
• 2^nd Lecture: How Capitalism Shapes Our Minds & Hearts – Complete, unedited video of live ZOOM lecture : http://bit.ly/YTnaie2
• 3^rd Lecture: Drivers of Social Change:   Sunday, 2 Apr 2023, 2:00pm PKT, For ZOOM links, see A New Approach to Islamic Economics

{bit.ly/AZiba23} Invited talk at IBA on 24th Feb 2023. Slides: http://bit.ly/SShist (Unedited Video:)

Brief Summary of Talk:

A: The Questions: Big and Small – Looking at the world around us, we see massive inequality. We also see that the West is far ahead of the rest in terms of wealth. So questions about how this happened, and what we can do to “progress” and become like the West, arise naturally. At the same time, we are faced with the “little” questions like what we should do with our lives – career, marriage, lifestyles, etc. From a personal perspective, the little questions appear to be the most important ones. Neither of these types of questions are discussed in a university education, which teaches us about physics, chemistry, math, and biology, but not about the forces which shape our lives and those of humanity as a whole. When we look into why these questions are not discussed, we find that there is a set of answers to them which is assumed, and built into the foundations of our education, without any explicit discussion. A Western education is built on lessons derived from the European historical experience. One of the central experiences which shaped European thought was the experience of a century of religious wars. This led to rejection of religion as a basis for organizing society, and the development of secular social sciences. Secular theories were based on rejection of God, Afterlife, Judgement Day, and hence focused on maximizing pleasure, power, and profits on this planet. These European views were spread throughout the planet via global conquest and colonization. They are perpetuated via a Western education, now nearly universal around the globe. These principles shape our thoughts about how to live, which careers to pursue etc. This leads us to the next question: how can we free our minds from these influences which have shaped our thoughts, without our conscious knowledge, and choose our own ways of thinking independently and freely?

B: Questioning the Foundations: The strategy used to shape our thoughts is insidious. The foundational ideas of a Western education are never actually brought forth for discussion or debate. They are implicitly assumed, and built into the foundations of what we are taught. Since these ideas are taken for granted by all of our Eurocentric educational materials, we learn to accept them without question. So the first step to counter this indoctrination is to bring out these hidden ideas into the open and to think about them. We all live in a capitalist economy, where an education aims to produce human resources which are valuable for sale in the market for human labor. This requires making us believe that making money is the goal of life – as money is the key to the pleasure, power, and profits we seek, having rejected God, afterlife and Judgment. Once this idea is articulated and made explicit, it becomes possible to counter it. Human welfare is strongly dependent on our social connections – loving and being loved – and not on how much wealth we have. Pursuit of wealth is counter-productive as it interferes with those activities which lead to a rich and fulfilling life. Whereas a Western education aims to create standardized and interchangeable parts for use in the capitalist machine, we must learn who we are, our unique capabilities and potentials, to make the best use of our lives. In particular, the Quranic message is that all of us are infinitely precious, and all the gold in the planet cannot pay for our lives, in conflict with what we are taught via capitalist education.

Section C: Self-Awareness: Once we realize that our thoughts have been shaped by larger historical forces, of which we are completely unaware, we can start to what these forces are, and how they have shaped our thoughts. Doing so, becoming aware of how history has shaped our thoughts, leads to possibility of liberation, of freeing ourselves by learning to look at the bigger picture, rising outside the tides of history, instead of swimming within its currents (see Three Mega-Events which Shape our Thoughts). My major concern was to resolve one glaring contradiction that emerged after my encounter with Tableegh led me to a strong faith in Islam. The message of the Quran had led ignorant and backward Bedouin to world leadership, and enlightened the world with knowledge for over a thousand years – how could it be that it has lost all its power today? Those who have this message are ignorant and backward, and a knowledge radically in conflict with the Quran is being taught globally, and shapes our everyday lives? Resolving this puzzle involves recognizing that there are two types of knowledge – that of the external world (science), and that of our internal world – our souls, spirit, desires, and reasoning. Whereas the West has made amazing progress in knowledge about the external world, they have also become increasingly ignorant about the internal world of human beings. As a result, they no longer have answers to critical questions regarding the meaning and purpose of our lives, which are of central importance to all of us.

Section D: Evolution of European Thought: How did this astonishing state of affairs come about, where Europeans lost touch with their own internal selves and spirituality, and reduced our lives to a meaningless pursuit of pleasure, power and profits? It all goes back to the century of devastating religious warfare experienced by Europe. It became clear to the Europeans that religion could not be used to organize society. It became necessary to create a secular society, and confine religion to a private belief system. Rejection of religion led to the conception of man as an animal, and life as a jungle of fierce competition governed only by survival of the fittest. Modern social sciences are founded on these framing ideas, which are anti-thetical to Islam. This is why application of these “sciences” have led to a state of permanent warfare, massive inequality, exploitation of the poor and powerless by the wealthy and powerful, and a looming climate catastrophe. This illustrates the title of the talk, about how historical experience has shaped the western social sciences.

Section E: Non-Eurocentric European History: In order to learn more about the historical forces which have shaped our lives, we have to learn European history from the outside – not the history which is taught in Eurocentric versions we read in our Western education. In Eurocentric history, we learn that the world was in darkness until the sun of reason rose in the West somewhere within the 13th to 15th century. In the light of reason, European saw the religion was superstition, created science, and made tremendous advances in all fields of knowledge to become the greatest and most advanced civilization the world has ever seen. The modern Social Science encapsulate the lesson of this European experience, and teach us all how we can recreate our primitive and barbaric societies on the European patterns. To counter this Eurocentric narrative, we have to realize that the dark ages of Europe ended with the reconquest of Islamic Spain, which gave European access to hundreds of thousands of books. A translation project brought a flood of knowledge into Europe, ending their dark ages. However, Catholic hostility to Islam, created by the Crusades, led to the erasure of Muslim contributions to knowledge. All contributions of the Islamic Civilization were either predated to the Greeks, or postdated to European copyists (see The Myth of Greek Origins of All Knowledge). European plagiarists – like Copernicus – became known as revolutionaries, because they incorporated several centuries of intellectual progress in their translations, never acknowledged to Islamic sources, because this was prohibited by the Catholic Church. This influx of knowledge ripped the Church apart, and created a century of religious warfare, which eventually led to the rejection of Christianity. The secular social sciences were built on the attempt to organize society without any moral principles.

Section F: Creating an Islamic Alternative: The false claim embedded in the name Social “Science” has deceived the world. Around the globe, societies are being built on European patterns embodied in the Social Sciences, under the impression that these are like the physical sciences. Once we recognize the toxic moral foundations of Western social science, it becomes imperative to create an Islamic alternative. This has become recognized by many thinkers, Muslims and Others. Many efforts are under way to decolonize the social sciences. Among these, I would take note of Recep Senturk’s lectures on Decolonizing the Social Sciences. A sketch of my own efforts in this direction is given in Rebuilding Social Sciences on Islamic Foundations Part 1 and Rebuilding Social Sciences on Islamic Foundations Part 2. I have also outlined a methodology for rebuilding social science on patterns provided by Ibn Khaldun in Uloom-ul-Umran: Islamic Alternative to Western Social Science.

This is a summary of part B of Chapter 2: Historical Origins of Islamic Economics. This part is about the birth of Islamic Economics in the 20th Century as part of the freedom movements of the colonized Islamic world. It also discusses the susequent evolution of the subject in response to emerging historical circumstances. For the previous part A, see Modern Versus Ancient Islamic Economics

Islamic teachings have been viewed as a complete and perfect guidance for all times. However, it is not a manual that explains everything. For instance, the Quran does not teach people how to ride a horse. Rather, guidance, in this context, means overall principles of conduct that remain the same across time. A compass, for instance, can tell people the direction they need to take, from among the 360 possibilities. This is extremely valuable, but it does not tell people to watch out for a ditch in front of them. To defend the Ummah is invariant across time, but archery, guns, artillery, planes, and other technology of warfare evolve across time. See Quran: Complete and Perfect Guidance

The Quran provides people with goals they must pursue via any economic system. But particular details of how to pursue them are not specified. The moral imperatives are feeding the hungry, taking care of the basic needs of all the population, social responsibility, generosity, and compassion. Simple living entails needs and comforts but no extravagance. Modern economics replaces morality by rationality. Instead of being moral, people should be rational.

Modern Islamic Economics was born in the 20th century. Maulana Maudoodi and Allama Baqir Sadr, the founders of modern Islamic Economics, clearly recognized the radical differences between the moral imperatives of an Islamic Economic system and the accumulation of wealth, which is the ultimate goal of capitalism and communism. They sketched the theoretical foundations of the economic systems that would be used by the newly liberated Islamic countries. These systems would be different from and superior to capitalism, socialism, and communism.

The evolution of economics has been shaped by both demand and supply factors, as well as emergent historical and political circumstances. The underlying spirit, invariant across time, is to learn how to implement the orders of Allah T’aala to create a just economic society, which provides unlimited opportunities for growth in all dimensions – especially spiritual – to all members of the society. There has been much difference of opinion both in terms of understanding the orders of Allah and in terms of means of implementing them in modern societies. See CIE2 Crisis in 2nd Generation Islamic Economics

The first wave of Islamic Economics was revolutionary. Freedom struggles across colonized Islamic lands were motivated by the desire to live in an Islamic state. The first wave of Islamic Economics articulated the system such states would follow. The first wave was concerned with broad principles and with differentiating Islamic Economic System from Capitalism and Communism. Key factors are that basic needs are a social responsibility. Historically, Islamic states provided healthcare and educational opportunities to all, outside of the marketplace. The system of Awqaf was used for funding. See: How Can We Create an Islamic Economic System?

For various reasons, movements to create Islamic states did not succeed anywhere in the Islamic world. Institutional structures of the newly liberated colonies remained the same because the power elites benefited enormously from these structures. A real revolution would have empowered the masses against the rulers, and this was prevented. Islamic names and ideals were adopted, but flouted in practice. This gave rise to the pragmatic second wave.Impact of Colonial Heritage on Economic Policy in Pakistan

The evolutionary strategy entails starting with capitalist institutions and gradually modifying them to align with Islamic ideals. This strategy has played out differently in different domains. In particular, the ban on interest has absorbed the greatest energy. Interest-free banking, for instance, is widespread over the Islamic world. There is a distinction between Sharia compliant (body but not spirit) and genuine Sharia (body and spirit). Musharka-Based Mortgages, now in use in the USA, and Takaful versus Insurance are some specific examples. The spirit of Musharka is to create a partnership, co-ownership between financier and purchaser. Similarly the spirit of Takaful is to help each other in time of need. In Capitalist forms – mortgages and insurance – both parties work for their individual profits and have adversarial interests, as opposed to partnerships. Today, Islamic variants comply with the letter of the Islamic Law, but are often opposed to the spirit which drives the law. (See: Building Genuine Islamic Financial Institutions)

The body of knowledge produced by Europeans over the past five centuries is highly Eurocentric. Global conquest and colonization spread this worldview over the globe. It is perpetuated by Western education today. No genuine alternatives are available. Islamization of knowledge aims to replace Eurocentric social structures by Islamic ones. Islamic Economics is one part of this effort to create the knowledge required to replace Western methods of organizing societies by Islamic Institutions. See: CIE1 Islamization of Knowledge

The ends the summary of Chaper 2: Historical Origins of Islamic Economics, of the book Islamic Economics: The Polar Opposite of Capitalist Economics. See homepage of book at http://bit.ly/iepoc for access to summaries of other portions of the book.

{bit.ly/IEPC2A} This is a summary of Section 2.1 of “Islamic Economics: the Polar Opposite of Capitalist Economics“. Previous summaries, and downloads for chapters are available from this page (shortlink: bit.ly/iepoc)

When we discuss Islamic Economics, we are immediately faced with some fundamental questions:

1. Why did Islamic Economics emerge as a discipline in the 20^th Century?
2. How can a branch of knowledge created in 20^th Century claim to be “Islamic”?
3. What is the status of “economics” within the Quran and Sunnah, the original sources of Islamic teachings?
4. What is the status of “economics” within the thousand year old intellectual tradition of Islamic scholarship?
5. How did these economic principles of Islam shape life in the Islamic Civilization over the past 14 centuries?

These will be answered in due course in this book. But a key to resolving these puzzles is to understand that modern economics itself has evolved and changed radically over the past few centuries. It started out as a branch of moral philosophy, shifted to a study of material welfare of human beings, and then to “scarcity” in the early 20th Century. Instead of being a study of good and evil acts in the economic realm, it became the study of the rational and irrational, (understood in the sense of European Enlightenment rationality, which differs substantially from Islamic understanding of the same). In particular, Jeremy Bentham rejected the moral foundations of Christianity, and replaced them with the idea that pleasure is “good” and pain is “evil”. This philosophy of utilitarianism continues to be the basis of modern economics.

Those trained in modern Economics find nothing in common with Islamic teachings and therefore think that Islam has nothing to say about economics. This is because modern economics is built on rejection of Christianity, and hence focuses on pursuit of pleasure, power and profits in this world. Islamic teachings tell us that the pleasures of this world are short-lived, and we should focus our efforts on success in the Akhira. When we formulate economics as a branch of moral philosophy, we find a lot of material about this in Islamic sources, the intellectual tradition of Islam, and the economic system prevalent in the Islamic Civilization for more than a thousand years.

It is useful to distinguish between “ancient” and “modern” Islamic Economics. The ancient Islamic Economics is based on moral rulings for individuals and businesses (the micro) as well as rulings regarding revenues and expenditures of the state (the macro). There is substantial literature, as well as deep impact of these teachings on economic affairs in the Islamic Civilization. But it must be understood that economic affairs are secondary to the pursuit of spiritual progress which is the primary goal with Islam.

Modern Islamic Economics was born in the 20th Century as part of revolutionary struggles against colonization. The West offered Capitalism, Socialism, and Communism, as economic models. In response, Muslim thinkers developed a theoretical framework for an Islamic Economic system, and offered it as a superior alternative for the newly liberated colonies. While political liberation of the Islamic world was achieved soon after the second world war, the process of decolonization of minds has only recently gotten underway. The development of Islamic Economics should be understood as part of an effort to achieve intellectual independence, and escape the Eurocentric worldview which is created by Wester education.

{bit.ly/NAIE1G} This is the final part G of Lec 1: Gratitude, Contentment, and Trust. Register for the free ongoing online course at: http://bit.ly/AZIEML – Next live lecture on Sunday, March 5th at 2:00pm PKT. For Zoom links and details, see: A New Approach to Islamic Economics. For a more detailed discussion of the present topic, see: Uloom-ul-Umran: Islamic Alternative to Western Social Science. For the original complete ZOOM lecture, see: http://bit.ly/YTnaie1

One standard objection to our proposed new approach to Islamic Economics is that Islamic Ideals are remote from reality, even in Muslims, let alone the non-Muslims. To answer this, we need to understand that the current social science methodology has failed. It has not produced helpful outcomes for humanity but rather has led to wars, climate catastrophes, inequality, and poverty. We cannot continue to build on the same grounds but need to reject the Western approach and rebuild from scratch.

Ibn-e-Khaldun originated an approach to the study of social change, which laid the basis for the modern social sciences, although they have deviated greatly from the original. I proposed to go back to his methodology, named “Uloom-ul-Umran” in his honor, and also to signal that we are rejecting the Western approaches. The Arabic word signals the connection to our own intellectual traditions, not just in economics but in all of the social sciences. The framework of social science in Uloom ul Imran approach is a three-dimensional approach. We have a positive dimension, which objectively describes what things are like. This includes non-Muslims, as well as failures of Muslims to live up to Islamic ideals. We also have a normative part, the prescription for the ideal that we want to work towards, and a transformative part, which tells us how to take the actual observed reality and move it towards the normative ideal.

All three parts are essential to social sciences, and if you look closely at modern economics, you will see that it has all three parts. It talks about its ideal, which is a perfectly competitive market, but it recognizes that the world is not perfectly competitive and provides strategies for how you can regulate monopolies and move things towards the competitive ideal.

Whereas it makes no sense to describe ideals for physical particles, for human beings and societies it makes perfect sense. We all have our ideals, and we work to achieve them. Especially in Islam, the Prophet Mohmmad SAW has been given to us as the model for excellence in all dimensions. We describe an ideal society as a goal to work for according to Islamic ideals, and then we work to create such a society. Although the ideal is unattainable, it gives us the direction for our struggles, tells us in which way to go, and helps us achieve the blessing of God. We may never get to that perfect idea, but as long as we work and struggle, we are successful. Allah looks at our struggle, has given us guidance on how we should struggle, but does not look for the outcome, whether we fail or succeed in worldly terms.

There is a deeper issue lying at the bottom of all of this. In the West, they have a theory of knowledge that emphasizes the knowledge of the external world, what is out there, what is objective. However, our Islamic tradition combines the objective and subjective, and recognizes that we cannot understand the objective except in relation to our own subjective experiences. The primary basis for learning is experience. Our experience is based on our hearts and spirit, the nafs, and our minds. This is a four-dimensional model for Islamic psychology, originating with Imam al-Ghazali.

Understanding human behavior is the basis for all social sciences. Today, Islamic psychologists are making a lot of progress by building on these foundations, from our own spiritual and intellectual tradition. Western psychology does not include the heart and soul; it only includes the desires and the rational mind. Including these gives us a much deeper understanding of human psyche, which is the basis for all social sciences. This means that we have a golden opportunity in front of us. By using our complete four dimensional model of human behavior, not available in, nor accessible to, Western intellectual traditions, we can rebuild all of the social sciences on Islamic foundations.

LINKS: Lecture 1: Gratitude, Contentment, and Trust split into sections A,B,C,D,E,F, and G. Short Links for writeups: http://bit.ly/naie1x  (replace x by A,C,D,F)​ http://bit.ly/NAIE1x (replace x by B,E,G)​. For more details about course, and ZOOM links to live lectures on first Sundays of each month, see: http://bit.ly/na2ie ​

POSTSCRIPT: I have recently started writing a new textbook for Islamic Economics based on a new approach to the social science. The first two draft chapters are available from Reclaiming Lost Narratives: A New Approach to Social Science

{bit.ly/naie1F} This is part F of lecture 1 on A New Approach to Islamic Economics. Register for the free ongoing online course: http://bit.ly/AZIEML – For lectures till now, and information about upcoming lectures, see Islamic Economic 2023 and Lectures.

It is easy to establish that many of the core theories used by Economists are false. For example, there is overwhelming empirical evidence against the theory of utility maximization; for a survey of this evidence, see Zaman and Karacuka (2011). Similarly, Romer (2016 ) documents how leading monetary economists persist in believing that monetary policy does not affect the real economy, despite very strong empirical evidence to the contrary. This failure of economic theory became obvious to all when economists failed to foresee the Global Financial Crisis (GFC) of 2007. Worse, leading economists confidently predicted continued prosperity, and dismissed warnings of trouble in financial market. After the crisis, many leading economists and practitioners realized that there were fundamental flaws in the structure of mainstream economic theories – for a collection of quotes, see “Quotes Critical of Economics“.

The question we wish to address is deeper than a one-time failure of economic theory. The same models which failed spectacularly in the GFC continue to be used after the crisis. The same models of consumer behavior overwhelming refuted by behavioral economists continue to be exposited in microeconomics textbooks, and taught to unsuspecting undergraduates around the globe. Central Banks around the globe continue to make monetary policy decisions on the basis of models known to be false. In a paper with the revealing title “Monetary Policy Without A Working Theory of Inflation“, Daniel Tarullo, former head of the Federal Reserve, writes that ” We do not, at present, have a theory of inflation dynamics that works sufficiently well to be of use for the business of real-time monetary policy-making”. Around the world, Central Banks continue to raise interest rates to fight inflation, while the data overwhelmingly contradicts this causal link – see “Do High Interest Rates Reduce Inflation? A Test of Monetary Faith”. So we can repeat the question of the title: Why do economists continue to use theories, even though they are well aware that empirical evidence is in strong conflict with these theories?

To answer this deeper question, we must dig deeper into the nature of economic theory itself. What is the function of economic theory, if it is not to learn the truth about how the economic system works? Once we explore economic theories within the historical contexts in which they arose, the answer becomes blindingly clear: economic theories serve to protect the interests of those in power. We provide a three examples of this below; for more, see ET1%: Blindfolds Created by Economics.

The Marginal Product of Capital: All economics textbooks argue that the returns to labor and capital (wages and interest) are determined by the technology, encapsulated in the production function, and the operation of competitive markets. None of them mention that this is a concealed moral argument to counter Marx’s claim that capitalists exploit labor. Since the returns to capital and labor are determined by the workings of the market mechanism in a symmetric way, with exactly the same mathematical form, we can conclude that both parties receive just compensation for their input to production. Both capital and labor are paid in proportion to their contribution to the productive process. Once we realize that a moral argument is being made, not a mathematical one, it becomes possible to counter this on several different grounds. Chapter 8 of Hill and Myatt’s Anti-Textbook of Microeconomics provides a thorough discussion. One line of argument comes from the strong empirical evidence that most firms set prices, which shows that markets are not competitive. If the capitalists are able to set prices for their goods, then they can also set wages to be exploitative. A second line of argument comes from the mathematics itself. Production functions where the two marginal products (to capital and labor) exceed the total product, are easy to find. In such cases, it is technically impossible to pay the marginal product to both factors. Why do textbooks never mention such cases, and confine discussion to a simple special case where the two marginal products exactly equal the total product? A third line of argument comes directly from moral philosophy. Laborers labor to earn their product. The capitalist “owns” capital to earn his reward – does ownership justify payment in the same way as working? One must look beyond all of this details to the bigger picture: A moral argument justifying payments to capitalists, and countering Marx’s charge of exploitation, is being made in mathematical disguise.

The Keynesian Revolution and the Monetarist Counter-Revolution: The intimate connection between economic theory and political power is clearly illustrated by the rise and fall of Keynesian Economics in the 20th Century. Confidence generated by theories glorifying the workings of a market economy led leading economists to predict permanent prosperity, just prior to the Great Depression of 1929. After the crash, Keynes set out to resolve the most glaring contradiction between economic theory and reality. While economic theory maintains that free markets automatically eliminates unemployment, the Great Depression created high unemployment which persisted for more than a decade. Keynesian theory recognized this failing of free markets, and placed responsibility for creating full employment on the government. Application of Keynesian theory led to a period of unprecedented prosperity in Europe and USA following the 2nd World War. However, there was a snake in the Garden of Eden: the wealth share of the top 1% declined precipitously between 1930 and 1980:

The top 1% fought back by a well-thought out multi-dimensional plan to reverse this decline in their wealth shares; details of this planning are available from Naomi Klein’s Shock Doctrine, and Alkire and Ritchie Winning Ideas: Lessons from Free Market Economics. A central element of this plan, implemented in the Reagan-Thatcher era, was the rejection of Keynesian economics and a return to the same pre-Keynesian ideas that had been proven wrong by the Great Depression of 1929. Modern textbooks of labor theory continue to teach that free markets eliminate unemployment, blithely ignoring the massive amounts of empirical evidence against this proposition. Chicago school economists argued that government interventions to create full employment bring about short term increases in employment, which are reversed in the long run. Furthermore, such interventions inflict great costs upon the economy in the form of high inflation. Central Banks responded by dropping the goal of reducing unemployment, and shifting policy focus to fighting inflation only. The result was a long period of economic stagnation, with high unemployment, which weakened power of labor force and enabled capitalist exploitation, reflected in the rapid rise of the wealth share of the top 1%. Another graph which shows that the productivity rose, but all of the gains went to the wealthy, while the labor share remained constant, is given below:

This clearly demonstrates why economics textbooks stick to the theory that free markets create full employment, when they obviously do not (see: 70 years of failure by economists to understand the labor market). Allowing unemployment to exist, and preventing the government from intervening to eliminate it, permits capitalists to exploit labor to the hilt, appropriating all gains from increasing productivity, and denying labor any share of the increasing profits.

The Scarecrow of Scarcity: As detailed in my paper on “The Normative Foundations of Scarcity”, the foundations of economics were shifted from an approach focusing on material welfare, to an approach based on scarcity. When we ask “Why?” we find the same answer: the concept of scarcity is designed to conceal the wealth of the rich, and protect it against the claims of the poor. This is a continuation of a strategy adopted by Malthus, who argued, purely from his imagination and without any data, that poverty was due to high fertility rate of the poor, and giving them food would only increase this rate of growth and be counterproductive. The proponents of scarcity argue that the reason that there are over a billion people living below the poverty line on the planet is because of the scarcity of resources to feed them. However the data on food per capita contradicts this view:

The data shows that in all continents, including Africa, the per capita kilocalories supplied by food has been increasing, and is above minimal requirements. So poverty does not exist because there is not enough food for all, it is because planetary resources are concentrated in the hands of a few rich people. As Gandhi observed: “There is enough for everyone’s need, but not enough for everyone’s greed”. The obvious solution to the problem of poverty lies in the redistribution of wealth. But, since this would harm the interests of the wealthy, this line of thinking is actively discouraged. Nobel Laureate Lucas states that: “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution. The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production.” While many different lines of research have converged on the truth that elimination of poverty requires redistribution of wealth concentrated in the hands of a tiny minority, economists stubbornly refuse to acknowledge this, and insist that we must create more growth and acquire more wealth in order to be able to feed the poor.

Concluding Remarks: Feynman argued that the defining characteristic of scientific theories is that they are rejected and revised when they conflict with experimental evidence: “It doesn’t matter how beautiful your theory is, it doesn’t matter how smart you are. If it doesn’t agree with experiment, it’s wrong“. These three examples above, as well as a host of others not discussed, show that the defining characteristic of textbook economic theory is that it remains the same regardless of how much empirical evidence accumulates against it. A closer examination of progress in economic theory shows clearly that the core has remained the same, while the evolution and progress has been in the complex defense mechanism devised to protect these core theories against mountains of accumulating conflicts with empirical realities. Regarding these tendencies, Romer writes that the economists’ “dismissal of fact goes so far beyond post-modern irony that it deserves its own label. I suggest “post-real.” While it is impossible to understand the evolution of economic theory as a progressive increase in understanding the complex economic reality, it is easy to understand all resistance to change when it is viewed as an ideology designed to protect the interests of the wealthy and powerful.

{bit.ly/NAIE1E} This is part E of Lecture 1: Gratitude, Contentment, and Trust – Register for ongoing online course on A New Approach to Economics at http://bit.ly/AZIEML. This part 1E continues the discussion of part 1D: Methodology, explaining how confusions about methodology have affected the discipline of Economics.

A major source of confusion is the widespread acceptance of Milton Friedman’s methodological stance. His enormously popular essay on “The Methodology of Positive Economics,” claims that economic theory is positive – it describes and does not prescribe. At the same time, Friedman asserts that significant economic theories have wildly inaccurate assumptions. It is possible to resolve the glaring contradiction between “wildly inaccurate assumptions” which must nonetheless be “descriptive, not prescriptive” only by invoking the logical positivist philosophy. Instead of going through this complex route, and explaining how the failure of logical positivism also implies the failure of Friedman’s methodology, we take a a more simple and direct route to this same result: Economics claims to positive and descriptive, but is actually normative and prescriptive.

This can be illustrated by the economic theory of behavior. The concept of “Rational” behavior is normative – it tells us about an ideal form of behavior and is prescriptive. This prescription – that rational behavior involves maximizing pleasure over our lifetime – arises from rejection of Christianity, God, Judgment, and afterlife. It should be obvious that maximization of pleasure in this lifetime would not be rational for those who believe in an infinite afterlife. Referring to this irrational tendency of men, the Quran states: “Nay! You prefer the life of this world, although the Hereafter is better and more lasting”. Our central point here is that economic theory of behavior is a normative theory which emerges out of rejection of religion.

It is a separate question as to whether this normative theory describes actual behavior of human beings. Experiments to assess this have been carried out since the 1960’d and overwhelming evidence has accumulated against the theory of utility maximization. For details see The Strong Conflict Between Human Behavior and Economic Theory. One of the most striking examples of this conflict is provided by the Dictator Game (a variant of the Ultimatum Game), described in greater detail below.

In the Dictator Game, one person is asked to share a pile of money with a second person. They can take as much as they like for themselves, and the second person gets what they leave in the pile. Rational behavior dictates that one should take everything, but actual behavior shows that 50-50 splits are most common (about 30%). The vast majority of people take between 50% and 80% and leave at least 20% for others. Only people with training in economics take everything, and even then, only a few of them. The results show that, contrary to assumptions of economists, people care about others, and also about the social disapproval that comes from being seen as greedy.

The conflicts between economic theory and actual behavior occur in a wide range of circumstances. These conflicts arise from the economists’ assumptions that humans are selfish, competitive, and unemotional, while reality suggests that humans are generous, cooperative, and emotions often trump reason and calculation. A prime example of this conflict is the Prisoner’s Dilemma, where people often cooperate, contrary to the utility maximization model. Economists have spent more than fifty years trying to explain this cooperation as a case of long-run selfish behavior. Evolutionary biologists (Wilson, de Waal) have recently come up with a deep explanation for the failure of these efforts. They have shown that survival in harsh environments requires cooperation, and this behavior is built into human beings by evolutionary forces.

In conclusion, economic theories claim to be positive, but they are, in fact, normative. They do not describe human behavior; instead, they prescribe standards for “rational” behavior. Many papers show that those trained in economics learn to be selfish, proving that economic theory is normative. Furthermore, it teaches highly undesirable norms as depicted in homo economicus, who is cold, callous, and calculating. Economic theory is therefore not only inaccurate but also harms society by encouraging anti-social behavior.

LINKS to Related Materials:

• For details about Lecture 2: How Capitalism Shapes Our Minds and Hearts, at 2:00pm PKT, on Sunday March 5th 2023, see A New Approach to Islamic Economics
• Segments of Lecture 1 are listed below: (for full ZOOM lecture, see: http://bit.ly/YTnaie1 )
• 1A: Gratitude: http://bit.ly/naie1A
• 1B: Contentment: http://bit.ly/NAIE1B
• 1C: Trust: http://bit.ly/naie1C
• 1D: Methodology: http://bit.ly/naie1D
• 1E: Economics: http://bit.ly/NAIE1E