{bit.ly/naie1D} This is part D of Lecture 1 on “Gratitude, Contentment, and Trust in God“, which is the first of a lecture series on A New Approach to Islamic Economics. Register for this free ongoing online course at http://bit.ly/AZIEML

In previous parts of this lecture, we discussed the attributes of gratitude, contentment, and trust, as the behavioral bases for an Islamic approach to economics. This approach flies in the face of widely accepted assumptions about the nature of knowledge and science. These assumptions can be encapsulated under the label of “Scientism“, and are listed below:

• A: Science is the only valid source of knowledge.
• B: Science should describe empirical reality.
• C: Study of human societies can be done by the scientific method.
• D: We understand what the scientific method is, and how to apply it.

We briefly discuss each of these assumptions, and explain why they are wrong.

A: Is science the only valid source of knowledge? Obviously not. Our knowledge of human behavior is based on our personal experiences and empathetic observations of others. Even though our lives revolve around our knowledge generated by our social interactions, each of them is unique, and subjective, and not “scientific” knowledge of external reality.

B: Does Science deal only with observable external reality? Obviously not. Scientific hypotheses often concern unobservables like electrons, gravity, dark matter, electromagnetic forces, strings, and many other entities and forces which are beyond the realm of the observable.

C: Can we study human societies using the “scientific method”? Obviously not. Human beings, individually and collectively, are free to choose between good and evil. Whereas particles and matter are subject to deterministic laws, no mathematical equations govern the behavior of individuals and societies. Because of our freedom, social norms influence us to try to act in certain ways, to gain social approval. Also, human beings shape history by our choices. Knowledge revealed by God to the Bedouin 14 centuries ago changed the course of history. A historical and qualitative approach is essential to understanding the process of social change. However, in the “battle of methodologies” of the late 19th century Europe, this natural approach was replaced by the quantitative and mathematical approach now dominant – see Method or Madness? for more details of the major methodological blunder.

D: Do we understand what the scientific method is? No. A popular textbook by Chalmers “What is this thing called Science?” goes through many different ideas, coming to the conclusion that we do not have a clear answer to this question. For centuries, Western philosophers have been attempting to differentiate between scientific knowledge and other kinds of human knowledge, without any success. The latest approach, which enjoyed spectacular success in the early 20th century, had an equally spectacular crash in the late 20th century; see The Emergence of Logical Positivism. All of the four premises of scientism were advocated by Logical Positivism and came to be widely believed. Economists continue to believe in positivist methodology and use it to construct economic theory, even though it has now been discredited. After the collapse of positivism, confusion reigns as to the nature of science and scientific method. Since there is no clarity about what the scientific method is, the question of whether and how it can be applied to the study of human society is moot.

The source of all this confusion about science is the philosophy of Logical Positivism, which emerged in the early 20th Century. This philosophy was based on two misconceptions about science, which became widely accepted:

• Science is based purely on observations and logic
• Science is the only valid source of knowledge

Because this became widely accepted, the soft sciences – like politics, economics, etc. — were rebuilt on “scientific” foundations in the early 20th Century. Logical Positivism had a spectacular collapse later in the century, when it was realized that scientific hypotheses often involve unobservable real-world entities and forces, and also that there are many other sources of knowledge, beyond the realm of science. This made it necessary to rebuild the social science on non-positivist foundations, but this was never done (see: Rebuilding Social Sciences on Islamic Foundations Part 1 and Rebuilding Social Sciences on Islamic Foundations Part 2). Economists continue to believe in, and utilize, flawed positivist methodology as foundations for modern economics. One of the consequences of positivism is the rejection of morality as a branch of knowledge. This is obviously incompatible with Islam. Our new approach to Islamic Economics rejects positivism, and shows how we can rebuild the discipline on explicit moral foundations provided by Islam. It is important to note that all approaches to the study of human society must necessarily be built on moral foundations. Modern economics is built on the toxic moral foundations of greed, competition, and survival of the fittest – morality of the jungle. We aim to replace these by generosity, cooperation, and social responsibility as moral valued aligned with Islam.

LINKS:

• Ongoing Online Course: A New Approach to Islamic Economics: http://bit.ly/na2ie
• Register for course: http://bit.ly/AZIEML
• Lecture 1: Contentment, Gratitude, and Trust in God: Full Lecture: http://bit.ly/YTnaie1
• A.Contentment: http://bit.ly/naie1A
• B.Gratitude: http://bit.ly/NAIE1B
• C.Trust: http://bit.ly/naie1C
• D.Methodology: http://bit.ly/naie1D

{bit.ly/naie1C} In Islam, trust in God (Tawakkul) is an important concept that is mentioned in both the Quran and Hadeeth. Some Ayat from the Quran are listed below:

• And whoever puts all his trust in Allah, He will be enough for him. (Q 65:3)
• And put all your trust [in Allah], if you truly are believers. (Q 5:23)
• He is Rabb of the east and west, there is no deity except Him, so take him as your Protector. (Q 73:9)
• Put your trust in the living Allah who never dies, and celebrate His praise. (Q 25:58)
• In Allah should the trustful trust. (Q 14:12)

As (65:3) states, if we trust in Him, He will be enough for us in all circumstances. This shows us the supreme importance of learning to trust in Allah. When life present us with difficulties and challenges, it becomes difficult to trust that Allah T’aala has created these difficulties for a purpose. Instead, we start thinking about how we might have been able to prevent these problems by doing this or that differently. This way of thinking is explicitly prohibited in the Quran:

No disaster strikes upon the earth or among yourselves except that it is in a register before We bring it into being – indeed that, for Allah , is easy – In order that you not despair over what has eluded you and not exult [in pride] over what He has given you. And Allah does not like everyone self-deluded and boastful –

When a disaster strikes, we should think that it was written for us, and contains hidden benefits which we are not aware of. Sometimes one difficulty saves us from a much bigger difficulty. Or, a difficulty is a punishment for a sin, which saves us from much greater punishments in the Akhira. Or, difficulties can be source of getting close to Allah T’aala by prayers, and patience in facing them can elevate our degrees and earn us great rewards. So, we should trust in Allah that whatever happen is the best for us.

As the Ayat also tells us, we should not become proud of our achievements and think that we have earned them on our own. Instead, we should acknowledge that whatever we receive is a result of Allah’s will, and it was written for us. Once we develop trust in Allah, we will not be anxious or worried about the future. We will carry out Allah’s commands and rely on Him to create the best possible outcome.

Allah tests us to elevate our degrees, increase our status, and forgive our sins. Even the prophets faced great difficulties and challenges. Therefore, we should not lose hope and have faith that Allah is calling us towards Him through our troubles. When we turn to Allah with humility and sincerity, we receive His blessings, which are greater than anything else.

In conclusion, we should trust in the promises of Allah more than anything else in this world. Our faith in Him should be stronger than our trust in money, power, and material means. Allah will find a way out for us from any difficulty if we have taqwa (piety and fear of Allah). This way will not always be visible, but Allah will create a path for us if we trust in Him. We should remember the example of how Allah parted the waters for Musa and trust that Allah will create a way for us, even if it seems impossible. May Allah bless us with strong faith and trust in Him during times of difficulty and ease.

LINKS:

• Register for Course: A New Approach to Islamic Economics: http://bit.ly/AZIEML
• Details, Dates, Times, ZOOM links, past lectures: A New Approach to Islamic Economics
• Lec 1A: Gratitude: http://bit.ly/naie1A
• Lec 1B: Contentment: http://bit.ly/naie1B
• Lec 1C: Trust: http://bit.ly/naie1C  (this lecture)
• Complete Video Lecture: http://bit.ly/YTnaie1
• Slides for Complete Lecture: http://bit.ly/SSnaie1

{bit.ly/NAIE1B} Part B of Lec 1: Gratitude, Contentment, and Trust in God. Free ongoing online course on A New Approach to Islamic Economics – Register at: http://bit.ly/AZIEML

Contentment is a prized characteristics in Islam. It means being satisfied and grateful for what we have been given by Allah, rather than constantly seeking more material possessions or worldly success. In today’s society, where materialism and consumerism are rampant, contentment can be a difficult trait to cultivate. We can strive to achieve contentment through certain spiritual practices and by deepening our  understanding of the purpose of life. According to a Hadeeth, true wealth does not lie in accumulating worldly goods, but rather in having a content heart that is grateful for the blessings of Allah. Spiritual strategies for achieving contentment emphasize finding inner peace and happiness in one’s current situation rather than chasing after material possessions.

Success according to Islam, lies in obeying the orders of Allah, not in achieving external markers of success. Society teaches us that we need to have a certain job, a certain degree, a certain amount of wealth, popularity, fame, or family, to be considered successful. This mindset leads to discontentment and a lack of gratitude towards Allah. We need to learn to appreciate what we have been given and understand that our external circumstances have been designed as best training grounds for us, even if they appear to be difficult.

To cultivate contentment, we need to learn to focus on process thinking rather than outcome thinking. In process thinking, the goal is not to win or achieve a certain outcome, but rather to focus on doing our best in the situation we are in. In the eyes of Allah, the king and the peasant are equally capable of passing and failing tests. We must learn to see all circumstances, whether easy or difficult, as tests that we must pass. We need to understand that the purpose of this life is to collect the best deeds, and that even the smallest deeds done with sincerity count heavily with Allah.

The Quran tells us that the life of this world is short, and that the rewards for the good deeds we do will last forever. When we focus on the Hereafter and realize that this life is only temporary, we will be able to do the deeds that Allah wants from us. We must learn to never complain about our situation, and to be grateful for what we have been given. Even in the most difficult of circumstances, we should remember that things could be worse, and that Allah has placed us in this situation for our benefit. We should concentrate on doing good deeds, serving the creation of Allah for the sake of His love, and making Allah happy.

In conclusion, contentment is an essential concept in Islam. We must learn to appreciate what we have been given, rather than constantly seeking more. We need to understand that true success lies in obeying the orders of Allah, not in achieving external markers of success. By focusing on process thinking, seeing all circumstances as tests, and doing good deeds for the sake of Allah’s love, we can cultivate contentment and bring peace and happiness to our lives. May Allah T’aala grant us the Noor of His guidance and create in us the characteristics pleasing to Him, and protect us from the characteristics which displease Him. Ameen.

• Video of Complete Lecture: Gratitude, Contentment, & Trust: http://bit.ly/YTnaie1
• Part 1A: http://bit.ly/naie1A
• Part 1B: http://bit.ly/NAIE1B  (this lecture)
• Slides for the complete lecture: http://bit.ly/SSnaie1  

(bit.ly/naie1A} This is a writeup of Lecture 1A: Gratitude of our ongoing free online course “A New Approach to Islamic Economics“. To register for the course, sign up at: http://bit.ly/AZIEML – This segment of the lecture explains how cultivating Gratitude towards Allah for all His favors and blessings is one of the keys to success in this life and the hereafter. For the full ZOOM video lecture see: Gratitude, Contentment, and Trust

Gratitude:

As Muslims, we are reminded in the Quran that if we are grateful to Allah, He will surely increase us in favor, but if we deny Him, His punishment is severe (Quran 14:7). Gratitude is a key strategy for success in this life, and in the hereafter. Here are some ways we can show gratitude to Allah:

Firstly, we should count the blessings of Allah. If we were to try to enumerate them, we would not be able to do so (Quran 16:18). We should be grateful for our health, security, clarity of mind, food, time, youth, and energy, while knowing that we cannot possibly count all of the blessings. When we wake up in the morning, we should be thankful for being given life after a mini-death and resolve to make the best use of the day, which may be our last.

Our Prophet Muhammad (peace be upon him) is the perfect example of a grateful servant. He would pray until his feet were swollen, and when it was asked why he did this, he replied, “Shall I not be a grateful servant?” (Al-Mughirah ibn Shu’bah). We should emulate him, and worship with a feeling of gratitude for all the blessings given to us, including the recognition of God, and the ability to pray.

 Personally, I used to struggle with laziness when it came to Fajr Salat. A verse from Iqbal says: “You do not love me, you love the comforts of sleep!”. Thinking of this made me ashamed to be so lazy, when Allah T’aala had given me so many blessings.

There is a Hadeeth which recommends the following two habits: In worldly affairs, look to those who have less than us and give thanks, and in religious matters, look to those who are more advanced and seek to follow them. If we adopt these habits, Allah will count us among those who give thanks and those who are content with what they have been given.

Also, we should be grateful for the small things in life. The Prophet Muhammad (peace be upon him) said, “Whoever is not grateful for small things will not be grateful for large things. Whoever does not thank people has not thanked Allah Almighty.” When we wake up in the morning, we should be thankful for being given life after the small death, for our health, security, comforts, and the precious new day. This day is an opportunity, perhaps our last, to buy Jannah with good deeds.

We should remember that success lies in the present moment, not in achieving desirable outcomes. When we eat, we should reflect on how many miracles have created our food. We should guard ourselves against ingratitude, which can lead to severe punishment. One of the reasons for ingratitude is when Allah T’aala opens up the riches of the world to us:

“And let not the abundance of (worldly) goods divert you, O man, from the remembrance of Allah; and whoever is ungrateful, then verily Allah is Self-sufficient, above all wants.” – Quran 28:77

And if Allah were to enlarge the provision for His slaves they would surely rebel in the earth, but He sendeth down by measure as He willeth. Lo! He is Informed, a Seer of His bondmen. (Qur’ān, 42:27)

In particular, this was demonstrated by Qaroon, who was given an immense amount of treasure. He puffed up with pride, and thought that he had earned this wealth due to his own cleverness and capability, and thus failed in his trial by wealth.

Another reason for being ungrateful occurs due to envy of others who have more than us. This makes us feel that we have less than what we deserve, leading us to the feeling of ingratitude for what we have been given. To cure this, we must get rid of pride (kibr), and replace it by humility. Instead of feeling we deserve more than what we have, we should feel that we have a lot more than what we deserve. Those with even a tiny bit of Pride will be cast into the hellfire, before the start of Judgment. To cure ourselves of pride, we should cultivate the feeling that we are the worst person on the planet – given the guidance and gifts that we have been granted by Allah, we should be far ahead in terms of our obedience to orders of Allah than what we do. In light of this failure, we should look at whatever we have and think that this is a lot more than we deserve.

One final understanding which is helpful in avoiding envy, and avoiding the desire for more which leads to ingratitude, is the understanding that both excess wealth, and insufficient wealth, are trials from Allah. This is made explicit in verses from Surah AL-Fajr which explain that excess wealth and insufficient wealth, both are trials from Allah and not signs of the pleasure or displeasure of Allah. The best amount of material comforts is the one which is just in accordance with our needs.

This ends our discussion of the first of the three qualities which Muslims are taught to cultivate. These qualities are very important in terms of our attitude towards worldly wealth and material comforts, which govern our behavior in the economic realm.

More details about our ongoing free online course: “A New Approach to Islamic Economics“. To register for the course, sign up at: http://bit.ly/AZIEML – For the full ZOOM video lecture see: Gratitude, Contentment, and Trust

{bit.ly/AZSusDev} Paper presented at: University of Lahore, Dept of Econ, 1^st National conference on Challenges and Opportunities for Sustainable Economic Development 23-24 May 2022 – Slides: http://bit.ly/SSusDev PDF: http://bit.ly/ScSusDev Paper: SSRN

The world is facing unprecedented levels of pollution, with Land, Earth, and Sea all impacted. The orthodox approach asks how we can continue economic growth in a way which is sustainable in the long run. However, this is the wrong question. Instead, we should be asking what the root causes of the climate catastrophe are, and what fundamental changes we need to make to prevent it. One significant cause is the Great Transformation caused by the Industrial Revolution, which created the capability for the production of massive amounts of surplus. This led to the problem of how to market this surplus, which required multiple changes in many different dimensions. One of the changes was the creation of a consumer society that motivates people to want more and more useless goods. Also the ideals of self-sufficiency and simplicity in lifestyles had to be rejected.

Making markets central society required making the pursuit of wealth the central goal of life. Creation of a labor market requires training people to think that their lives are cheap and for sale in return for money (see The Great Transformation in European Thought. The consequences of this mindset have been devastating, resulting in a blind pursuit of wealth without regard for others. Industrial production enabled the production of weapons on a large scale. Europeans used this capacity for violence to destroy self-sufficient economies around the globe. Colonization enabled European to reshape societies around the globe to be producers of raw materials for their industries, and consumers of their products. created demands for European products. The colonization of 90% of the globe by Europeans created a belief in the superiority of the West and the inferiority of the East (see Orientalism), which is perpetuated by Western education today.

The capitalist system is designed to exploit all resources and pursue the creation of wealth, but perpetual growth on a limited planet is impossible. Planetary resources are near exhaustion, but capitalism requires growth to survive as an economic system. Radical solutions based on de-growth, such as Less is More by Jason Hickel, Steady-State Economics by Herman Daly, and Doughnut Economics by Kate Raworth, are necessary. Conventional theory for sustainability is built on the three pillars of sustainable growth include inter-generational sustainability, environmental/ecological sustainability, and sustainability through social inclusion. However, these pillars are in fundamental conflict with a capitalistic economic system built on unlimited growth and exploitation. They cannot be implemented without making radical changes to the economic system. Islam provides us with a coherent alternative (see: A New Approach to Islamic Economics). Instead of religion, we will use the word deen for the way-of-life, to denote the all encompassing nature of Islam

Islam is the deen of nature, which teaches us to live in harmony and peace with all of God’s creation, including other human beings, animals, and plants. The West rejected Christianity as deen, reducing its scope to a system of personal beliefs, and created a new deen to replace it: secular modernity. Rejection of God, Afterlife, Judgment, leads to the conception of human beings as animals, and life as a jungle of ferocious competition. Economic theory takes the war of all against all, governed only by survival of the fittest, as the natural state for humanity. Islam offers us the vision of a society built on cooperation, generosity, and social responsibility. Among the keys to sustainable development is an alternative conception of property rights. Islam transforms property rights, treating property as stewardship and trust with limited rights, and the necessity to use property for the public good only. In contrast, the West treats property as an absolute right, allowing the owner to do whatever they please, even if it causes social harm.

To create an Islamic alternative, we need to recognize that climate change is created by the bad (evil) behavior of human beings, who exploit fellow human beings and the planet without any consideration for others. We must understand the teachings of Islam, which is a complete way of life that integrates all aspects of human existence and the environment. We need to transform our mindset and recognize that life is not about buying, selling, and money, but about developing our capabilities for excellence in diverse dimensions, including literature, philosophy, spirituality, athletics, art, and sports. We need to reject the pursuit of wealth and create a society that values simple life-styles, self-sufficiency, and offers higher visions and goals for life. This transformation will require radical changes in our education system, our economic system, and our values. Ultimately, it will require a fundamental shift in our way of life, which will enable us to live in harmony with all of God’s creation and ensure a sustainable future for generations to come.

Based on: Zaman, Asad and Qadir, Junaid, Islamic Approaches to Sustainable Development (December 18, 2021). vol 10, no 1, p 46-60, Int. J. Pluralism and Economics Education. 2019, Available at SSRN: https://ssrn.com/abstract=3988869

The two World Wars in the 20th century depleted the gold stocks of European governments and made a return to the (UK Sterling based) gold standard impossible. This led to the Bretton Woods conference of 1944, where leaders of the world came together to find an alternative, non-gold-based, global trading system. John Maynard Keynes brought a proposal for a symmetric trading system, but it was rejected in favor of the dollar standard, which transferred global hegemony from the UK to the USA. The US had enough gold reserves to guarantee convertibility of the USD into gold at $35 per ounce, and this system worked fairly well until the Vietnam War led to excessive expenditures of dollars and an insufficiency of gold to redeem them.

In 1971, President Nixon renounced the Bretton Woods agreement and de-linked dollars from gold, leading to a world of unbacked currencies with floating exchange rates. The Nixon shock created massive uncertainty about how the world would function with fiat currencies. The Hunt brothers thought the system would collapse, leading to a return to gold and silver. They nearly succeeded in buying up most of the silver in the world – see Speculative Financial Attacks. The US was aware that loss of confidence in unbacked dollars could lead to financial disaster. To prevent this, they engineered a deal with Saudi Arabia to ensure that petroleum would always be sold in dollars, effectively replacing gold backing with petroleum and creating the Petro-Dollar.

This system is hugely favorable to the US, as it can print paper and buy real goods from around the world. All other countries must export to earn dollars and participate in global trade. This effectively creates a financial colonization of the world where all countries must pay tributes to the US in the form of goods. The IMF is the collections agency for the loan sharks, and breaks the backs of economies who fall behind on their tributary payments. The current global trading system results in immense disparities between American levels of consumption and the rest of the world.

With the decline of US power for many different reasons, many different proposals for a more equitable trading system are now being discussed on international fora. A genuinely fair and symmetric system would balances exports and imports and place the burden of adjustment on the countries which are financially stronger, in contrast to current system. This is unlikely to happen, but a multipolar system which distributes power among the major financial powers in global trade is likely to emerge in the near future.

References: This is a slightly revised and edited version of A Lopsided Monetary System. For the Hunt Brothers episode, see “Silver Thursday“. For a more detailed discussion of the rise and fall of the gold standard in the 20th century, see On the Vital Importance of Understanding International Financial Architecture and International Financial Architecture: Part II. For a collection of articles analyzing different aspects of current financial crisis in Pakistan (and similar crises around the world) see: Economic Crisis in Pakistan: Analysis and Solutions.

{bit.ly/AZecp} Pakistan’s Economy seems to be trapped in an eternal cycle: Economic Prosperity => High Imports => BOP Crisis: Shortage of Dollars => Borrow from IMF => Stringent Conditions Imposed => Lower Imports, Higher Taxes, Destruction of Domestic Production => Slow and Painful Recovery => Economic Prosperity. I have published several articles which deal with various aspects of this cycle and provide some insights and solutions. Some of these are listed and summarized below. UPDATE: See most recent article discussing the current economics crisis in 2023: Current Crisis in Pakistan: Easy Solutions Blocked by Power

The articles below all deal with exchange rate and monetary policy issues in the context of Pakistan. They explain why the elites have preferred an overvalued Rupee, and created a consumer economy based on borrowing, even though domestic growth and development requires the opposite: An undervalued Rupee and a producer economy which favors cheap and low quality domestic products over expensive high quality imports. The final article traces the roots of these problems to the legacy of colonialism, with an an economy built to exploit and extract surplus from the population, rather than to create growth.

A Lopsided System: This article focuses on the global trading system and the role of money in it. The current system, which is centered around the US dollar, originated at the Bretton-Woods conference in 1944 as a result of the power of the United States, who rejected John Maynard Keynes’ proposal for a symmetric trading system. The article argues that this system has led to the financial colonization of the world, as other countries must strive to increase exports and earn dollars to back up their own currencies, while the US can simply print dollars. The US debt, which is $21 trillion, is a rough measure of how much tribute has been extracted. The author believes that with the emergence of China and the European Union as major players, the time is ripe for a transition to a more equitable global trading system that balances exports and imports and places the burden of adjustment equally on countries with excess exports and those with excess imports. See also: Dollar Hegemony: Causes & Consequences

Fear of Floating: The article discusses the concept of fixed vs floating exchange rate regimes in the context of modern monetary theory (MMT). It argues that floating exchange rates have benefits such as stability and protection from macroeconomic crises, but also presents the challenges of adjusting to a new economic environment. SUMMARY: The article explores the debate between fixed versus floating exchange rate regimes from the perspective of modern monetary theory (MMT). In a floating exchange rate regime, the central bank allows the supply and demand for currencies to determine the exchange rate, which can lead to sharp and erratic movements due to speculation and manipulation. The ‘fear of floating’ refers to central bank efforts to stabilize exchange rates, which ensures that movements are smooth and predictable, making foreign trade easier for exporters and importers. Most developing countries post-World War II preferred to peg their soft currency to the dollar, a ‘managed float’ or ‘dirty float’ regime, because it gives foreign investors confidence, helps traders make plans and is seen as a symbol of national pride. MMT recommends that governments avoid acquiring liabilities in foreign currencies and suggests that the world needs to create a consensus on a new method for global trade. The article concludes that free floating the currency shifts exchange rate risk from the government to the private sector, insulates the economy from macroeconomic crises and allows infant industries to grow.

Modern Money and Inflation: This article critiques Milton Friedman’s view that inflation is always a monetary phenomenon. Recent high inflation across the globe is not due to loose monetary policy following the Global Financial Crisis. Rather, cost factors such as the collapse of global supply chains, trade wars, energy prices, and natural disasters play a significant role in creating inflation in the recent past. On a more general and theoretical note, the Keynesian view that money flow into the economy will lead to increased production rather than inflation has strong empirical support. Modern Monetary Theory (MMT) sharpens Keynesian insight and recommends a Job Guarantee Program, where money is targeted towards unemployment, to prevent inflation. The most important challenge for policymakers in Pakistan is to apply MMT to provide productive jobs for the country’s valuable resource, its youth. See also: MMT for Pakistan.

Burning Billions: How an over-valued Rupee harms our economy – even though the opposite is widely believed. SUMMARY: The government of Pakistan subsidizes imports of luxuries by keeping the price of the dollar low, leading to a pattern of consistent overvaluation of the rupee. This results in a phenomenon known as Dutch disease, where the availability of cheap imports prevents the development of local industry, causing deindustrialization, declining exports, and a boom in the services sector. The influx of dollars from the US and Russia during the proxy war in Afghanistan and remittances from abroad created favourable conditions for Dutch disease in Pakistan. The country has fallen into a trap of building a consumer-oriented economy based on cheap imports, which is not sustainable in the long run. To create productivity in the domestic economy, the government must undertake structural transformation, which faces several obstacles, including the opposition from powerful and privileged classes who have been extracting revenues from the subsidy. The challenge for the government is to manage the transition in a way that minimizes disturbance and provides social support to those in need.

Rupee Over-Valuation: The same theme as previous article, with somewhat different explanations and empirical evidence for the thesis. SUMMARY: The article argues that the popular demand to control the devaluation of the Pakistani rupee ignores the fundamental economic realities. The equilibrium rate of the currency is arrived at naturally by the market and the only way for the government to maintain a value above the equilibrium rate is to sell dollars at a cheaper rate, which artificially adds to the supply of dollars and lowers the price. This policy of overvaluation of the rupee is equivalent to an across-the-board subsidy on all imports, which has negative effects on the domestic economy, such as preventing valuable industries from coming into existence. The article concludes that the long-term health and prosperity of the economy requires either fair or undervalued currency exchange policies, as the present policy of overvaluation cannot be sustained in the long run. Useful Historical BACKGROUND for the terrible policy of over-valuation is in the article: The Rupee is Falling: Let It Crash.

The Debt-Trap and Self-Reliance: This explains how perpetual excess of imports over exports creates a debt-trap. When we are forced to borrow foreign exchange for essential imports then we must agree to the terms of the lenders, which are extremely harmful for the domestic economy. To get out of the debt-trap, we must develop a self-reliant economy, which is never forced to borrow in foreign exchange.

Finally, a more general article explains the colonial mindset which has produced this situation. The English-speaking elites are running the country exactly like the colonizers used to – they are concerned with extracting surplus from the country, rather than creating growth and development which will reduce their power.

Impact of Colonial Heritage on Economic Policy in Pakistan: The article reflects on the failure of research-backed plans and good organizations serving the public interest in Pakistan. The problem is rooted in the legacy of colonialism, which resulted in the creation of two Pakistans – the upper class elites and the majority of the population. The educational system, which is designed to create respect for the British colonizers, has contributed to a distorted view of history, making it difficult for people to understand their place within it. The institutional structures of colonialism, such as bureaucracy, judiciary, police, and military, were not designed to serve the people but to maintain imperial order and extract resources. Today, the nature of these institutions remains the same, with bureaucrats being rulers of the country and having a mindset focused on extraction of revenue from an oppressed public.

{bit.ly/AZconflict} Over the past century, the theory that rational behavior involves maximization of utility has become central to Economic theory. In economics, this theory is established on axiomatic grounds, and supported by intuitions and speculations. However, When psychologists examined this theory of behavior by carrying out actual experiments on human behavior, they found that the theory leads to wrong predictions in many examples. By now, an overwhelming amount of evidence has emerged to show the strong conflict between economic theories of human behavior and actual behavior; a survey of is given in “Empirical Evidence Against Neoclassical Utility Theory: A Survey of the Literature,” This post provides the details of this conflict in one example taken from the paper, where four major predictions of economic theory are all in direct conflict with the experimental evidence. For a different approach, better aligned with realities of human psychology, see A New Approach to Islamic Economics

It is not just that utility theory is wrong, what is worse that it acts as a blindfold, which prevents economists from understanding simple realities of human behavior. The paper provides many examples of this phenomenon, which I will illustrate briefly with one simple example from section 1 of the paper. Another example which shows that stark conflicts between behavior and theory is given in a later post based on Section 2: “Game Theory for Humans with Hearts“.

Consider the two player Ultimatum Game. The Proposer (P) has ten dollars in single dollar bills. He makes an offer of $m to the Responder (R), which allows him to keep $(10-m). The responder can either Accept or Reject. If Responder Accepts than P get $10-m, and R get $m as proposed; it is convenient to denote this outcome as (P:10-m,R:m). If Responder Rejects, then both get $0: (P:0,R:0)

Here are four predictions made by Game Theory, based on utility maximization behavior.

1. Responder will be indifferent between the two choices Accept and Reject if he is offered $0.
2. Responder will Accept an offer of $1, resulting in outcome (P:9, R:1). R prefers 1 to 0.
3. Proposer believes that Responder is a Utility Maximizer; that is, he will behave in accordance with propositions 1 & 2 above.
4. Proposer will therefore offer $1, as it maximizes his share at $9. If he offers $0, the outcome is uncertain because both responses A and R are possible maximizing responses, which is why an offer of $1 is the unique utility maximizing offer.

All four of these propositions are false. Furthermore, every layman will easily be able to see that all four of these propositions are false. However, economists have great difficulty in seeing that they are false and in understanding why this is so. This is because economic theory teaches economists to “think like economists” which means modelling humans as being homo economicus: cold, selfish and callous (Vulcans, for short). This makes economists unable to understand real human behavior. As everyone (except economists) knows, the responder will reject the offer of $0; he will not be indifferent between accept and reject. Empirical studies conforming to our intuition about human behavior show that in situation 2, the vast majority of responders will reject the offer of a 10% share, preferring to get $0 rather than accepting injustice or an unfair offer.

While no one else is surprised by this [rejection of small offers], economists are startled to learn about this routine finding of the ultimatum game. Empirical findings of research on ultimatum game along these lines were routinely rejected by economics journals on the grounds that small stakes and unfamiliarity led people to irrational behavior in an artificial environment. As Colin Camerer , Behavioral Game Theory 60-62 (2003) puts it: “If I had a dollar for every time an economist claimed that raising the stakes would drive ultimatum behavior toward self-interest, I’d have a private jet on standby all day.” Despite this ideological conviction of economists, experiments at high stakes, equivalent to one months salary, replicated this phenomenon of refusal of unfair offers. Widespread robust replication in different environments designed to answer the standard objections to experiments ultimately led to a reluctant acceptance by economists, and publications of these results in reputable journals. However, despite the flat rejection of utility theory by human behavior, this theory continues to be taught as a “tautological” truth in mainstream economic textbooks.

The fact that proposition 3 is false is somewhat deeper than the fact that 1 and 2 are false. Whereas 1 and 2 represent false assumptions by economists about human behavior, 3 represents a stronger false assumption about human beliefs about human behavior.  Even if the proposer is Vulcan, he might have enough intelligence to realize that others on this planet are not like him. In which case, he would not rely on propositions 1 and 2. Even a Vulcan may be able to realize, without necessarily understanding why, that normal human beings might resent being offered such a pittance, and might refuse a low offer for emotional reasons. However, not only does game theory teach economists to think that everyone is a Vulcan, it also misleads them into believing that everyone is a stupid Vulcan – they cannot figure out that they are on planet Earth, and therefore other people will not behave like them. It is only a stupid Vulcan who will offer $1 under the mistaken belief that the responder accept this offer because $1 is better than the $0 he will receive by rejecting. We cannot quantify the level of stupidity displayed by economists who calculate outcomes of games under the assumption the every on this planet is a stupid Vulcan, are surprised when their predictions fail to match reality, and stubbornly refuse to revise theories in face of obvious conflicts with Reality. Keynes rejection of classical theories led him to the same perception of economists: The classical economists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight, as the only remedy for the unfortunate collisions which are occurring. 

And that is why the findings of behavioral economics conflicts with economic theory, and are not welcomed by economists. When economists talk about “sound” microfoundations, these are the micro-foundations upon which they wish to build a macroeconomics. In his written testimony for the Congress on “Building a Science of Economics for the Real World” Robert Solow wonders about which planet the macro policies based on DSGE models are designed for.  Despite overwhelming evidence against it, utility maximization continues to be used as the foundation of microeconomics in all textbooks. We provide an alternative, based on radically different principles, in A New Approach to Islamic Economics

{bit.ly/na2ie} This post provides details of our ongoing free course on Islamic Economics, with lectures every first Sunday of each month: next live lecture on 2:00pm PKT on 5th Junel, 2023. Details and ZOOM links for the lecture topics are given at the bottom of this post. For access to many additional lectures, and supplemental materials, register for the online course at the Al-Nafi platform: http://bit.ly/IEalnafi You can also join a weekly mailing list for Islamic Economics at http://bit.ly/AZIEML A website for the course also provides access to all past lectures, and other resource materials for the course: https://sites.google.com/view/islamic-economics-2023/

Our new course takes a unique approach to the subject. This course is founded on the idea that the final message of God to mankind is just as revolutionary today as it was 14 centuries ago. Fourteen centuries ago, the revelation transformed ignorant Bedouin into world leaders, and created a civilization which enlightened the world for more than a 1000 years. This message provides us with complete and perfect guidance on how to build a society in all dimensions, including economic and political. The problem today is that, instead of looking to the Quran, Muslims are looking to the West for guidance in all affairs.

This problem is especially evident in the field of Islamic Economics. Modern Economics is based on conceptual frameworks and institutional structures which arose in Europe after the rejection of Christianity. Denial of God, Judgement and afterlife leads naturally to the conception of life as jungle of fierce competition, governed solely by the survival of the fittest. Modern economic theory is based on maximizing the wealth of nations, and the pursuit of pleasure and power on this earth. It should be obvious that this conceptual framework has no correspondence to Islamic ideas.

For the past fifty years, Islamic Economists have been making efforts to build the discipline as a variant or a branch of Capitalist Economics. These efforts to merge fire and ice have failed. Instead of building on foundations of modern economics, and modifying European textbooks to “Islamize” them, our new course proposes to build an economic theory on the foundations of the Quran and Sunnah. The first lecture will be about Gratitude, Contentment, and Trust, concepts missing from modern economics textbooks. These character traits provide a radical alternative to fundamental behavioral assumptions of modern economics, captured in the selfish and greedy homo economicus. It should be obvious that a society and an economic order built on cooperation, generosity, and social responsibility will be very different from one built on competition, greed, individualism, and hedonism. Our new approach will highlight these differences.

As discussed in detail in my book “Islamic Economics: The Polar Opposite of Capitalist Economics”, the Islamic Economic system differs radically from the capitalist economic system in all dimensions. Our new online course is loosely based on the book, but attempts to simplify the message, and to render it of practical value in terms of creating alternatives to capitalist institutions.

DETAILS: The course will have live ZOOM lectures on the first Sunday of every month. All members on the mailing list for the course (http://bit.ly/AZIEML) will receive supplemental reading materials on the third Sundays, so that effectively there will be two lectures every month, one live, and one based on videos and readings. The course is expected to continue for about six months. For details about past lectures, see Online Course: IE 2023

Next live lecture will be on Sunday 4th June at 2:00pm PKT. Every Sunday Additional materials (posts/videos/etc) will be emailed to members of the mailing list at http://bit.ly/AZIEML – Complete course materials will also be available on the Al-Nafi website at http://bit.ly/IEalnafi

All previous lectures are available on from the course website: https://sites.google.com/view/islamic-economics-2023/lectures

UPCOMING LECTURE:

Sunday June 4th 2023: Money and Monetary Policy in an Islamic Economy
Time: 02:00 PM Islamabad, Karachi, Tashkent
(Local time in different countries:
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Indonesia: 4 PM)

Al Nafi Zoom Room is inviting you to a scheduled Zoom meeting.

Topic: A New Approach to Islamic Economics
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This is part 3 of a talk on Foundations of Islamic Economics; for previous post, see Part 2: Reconceptualizing Islamic Economy. Nations-states are a creation of European politics, and responsible for enormous amounts of blood-shed and violence, the most ever seen in world history. Over Islamic World, these were explicitly created as part of a divide-and-rule strategy. Wael Hallaq, in his landmark book “The Impossible State” explains how underlying concepts of modern nations cannot be reconciled with Islam. This also implies that the “Islamist” strategy of capturing state power to implement Islam cannot succeed: we cannot use un-Islamic means achieve Islamic goals.

Because of the enormous amounts of power wielded by Nation-States today, we cannot ignore them in any strategy for Islamic Revival. So with the understanding that any engagement with these poisonous political structures can only be a part of a transitional strategy, and must be handled with great caution, we proceed to discuss some of the interventions which would be useful at the national level.

As usual, we must first unlearn some popular myths, which will block our efforts at using this construct (nation-state) effectively for Islamic causes. Some of the one relevant to the present discussion are the following:

1. Export Promotion is path to development and growth.
2. Governments must raise money by taxes and borrowing, to finance expenditures.
3. Banks do not create money, government does, via money multiplier.
4. Inflation is solely due to money creation, and can be controlled by monetary policy.

To counter these, we need some Liberating Truths. The first among them is: The path to economic growth and development requires development of local productive capacities. Achieving this today REQUIRES protection from foreign competition. Free Trade benefits the strong economies, and destroys the weak, making them incapable of developing local industries. Globally, industrialization (and development) has always taken place behind walls of protection.  Here, I am bypassing the discussion of what growth and development really mean. For our current purposes, development means developing a self-reliant economy. Failure to understand this critical point has landed us squarely in:

The Debt-Trap

Currently Exports from Pakistan are around USD 30 Billion and Imports are 60 Billion. To finance the gap, we need to borrow USD. When we borrow USD, we must comply with terms imposed by lenders. Lenders are happy to lend, even if they know that we will never be able to repay, because leverage to control our economies gives them enormous benefits (see: What they don’t teach in economics textbooks). Due to the economic leverage created by debt, in 2012, USD 2 Trillion was sent by poor borrowing countries to rich lending countries (see: Jason Hickel: Aid in Reverse: How Poor Countries Develop the Rich). 

Deeper than the debt-trap itself is the WHY of the Debt-Trap. The fundamental cause is allegiance to Free Trade Theory. Free Trade theory was invented by English Economists, AFTER UK had acquired a fifty year lead over Europe via Industrial Revolution. Adoption of Free Trade policy created Recession in Europe, and Growth in UK. German Economist Friedrich List invented the Infant Industry argument, protected German Industry via trade barriers (see Free Trade and Development by Syed Ahmad), allowing Germany to catch up.

Today, the WTO (World Trade Organization) was created by the powerful and wealthy, and imposed on weaker countries by force, and has brought great benefits to the rich. The graph below shows how the benefits of free trade have gone largely to the wealthy countries:

Pakistan joined WTO in 1995 and started lowering its tariffs. Around 2003, the tariffs were lowered to below 15%. This drove many local industries out of business, and dramatically worsened the trade balance. This has led to repeated BOP crises as Pakistan needs borrows to pay for essential imports. Today, as the threat of default on foreign debt looms, finding solutions to the debt-trap is of primary importance. We provide a sketch below (see also The Debt-Trap and Self-Reliance), divided into short, medium, and long run solutions.   

Short-Run: Political Solutions: There are MANY viable options to solve the BURNING problems. The MAIN obstacle to implementing short run solutions is Political. Who will bear the burden of the sacrifices required for these solutions? This creates power struggles between Bureaucracy, Politicians, Army, and Foreigners with huge amounts of money to influence outcomes. Solution requires united front on defending Pakistan – which requires some political engineering. It is also of essential importance to protect local industries from collapse. This requires Bailout Money and Political Support. 

Medium Term: Develop Self-Sufficiency in Energy and Agri-Products. If we make a concentrate effort, we can achieve this in 3-5 Years. Self-sufficiency means that we would never need to borrow foreign exchange for essential imports, allowing us to create independent plans for economic progress.

Long Run: Develop local industries under tariff barriers: We need to develop Self-Reliance to create a viable economy in the long run. Report of Council of Islamic Ideology on Elimination of Interest 1980 provides a detailed step-by-step transition plan to a self-reliant economy. The plan needs to be updated, but outlines are sound.  Pakistan HAD, and LOST, industries in: Silk, Mobiles, Small Electronics, Large Electronics, Telecommunications, Aviation, etc. etc. Industries all over the world have collapsed due to Chinese competition. This has caused MASSIVE damage to producer confidence. We need to develop local producers, protect them from foreign competition, and assure them of government support in times of crises.  

End of Part 3

Part 4 deals with the FInancial Sector, and what needs to be done to create zero-interest economy.