Tag Archives: finance

The Veil of Money

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This may be surprising to non-Economists, but mainstream economic theories describe a world where money plays a marginal and unimportant role. This is called the doctrine of neutrality of money. My writings on money — see GUIDE: The Veiled Power of Money — are organized into a sequence of seven hubs. This post is the first HUB which provides a guide to my posts and writings discussing this issue, and the reasons why money is marginalized in economic theories. For a related post, explaining that the key difference between mainstream and heterodox economic theory lies in the role assigned to money, see: Economics As If Money Mattered.

1. The Astonishing Claim

“In this model, the effects of monetary policy are so insignificant that postal economics is more central to understanding the economy than monetary economics.”
— Edward Prescott (see: Romer’s Trouble With Macro)

Prescott was referring to Real Business Cycle (RBC) models — a highly influential strand of modern macroeconomics in which output, employment, and growth are determined by technology and preferences. In these models, money may affect prices, but it does not determine real economic outcomes.

And yet modern economies run on money.

Banks create it.
Governments depend on it.
Asset markets move with it.
Financial crises erupt when it contracts.

Ordinary people assume economics is about money. But much of modern macroeconomic theory is built on a sharp distinction between “real” and “nominal” variables — a framework in which production and employment are governed by real forces, while money is treated as a secondary layer over an underlying exchange economy. For more details, see Nominal Versus Real Models.

The result is striking: the central institution of modern capitalism is largely absent from its core models.

As the heterodox economist Steve Keen has put it (see: Quotes Critical of Economics):

“How anybody can think they can analyze capital while leaving out Banks, Debt, and Money is a bit to me like an ornithologist trying to work out how a bird flies whilst ignoring that the bird has wings.”

Between Prescott’s formal neutrality and Keen’s metaphor lies a puzzle.
How did economics come to analyze modern capitalism as if money were incidental?

To answer that question, we must begin with an old and powerful idea: that money is merely a veil.

2. The Veil Doctrine

The idea that money is secondary to “real” economic activity has deep roots. Classical economists described money as a veil: behind it lies the real economy — production, labor, technology, exchange. Money merely facilitates trade; it does not determine outcomes. For more details, see: Looking Through the Veil of Money.

This intuition became formalized as the classical dichotomy: a separation between real variables (output, employment, productivity) and nominal variables (prices, wages, money). In this framework, money affects prices but not the real structure of the economy.

The Keynesian Revolution challenged this separation. Keynes argued that excessive money leads to inflation, while insufficient demand — and insufficient monetary expansion — leads to unemployment. This gave governments a central role in stabilizing economic activity. In the decades following World War II, Keynesian policies, combined with strong financial regulation, coincided with sustained growth, high employment, and rising income shares for the bottom 90 percent in Western economies.

Financial regulation after the Great Depression had already constrained speculative banking. When combined with demand management policies, the result was a prolonged period in which the power of the financial sector was limited relative to labor and industry.

The monetarist counter-revolution, associated most prominently with Milton Friedman, rejected Keynesian demand management and restored the classical emphasis on monetary neutrality. The Quantity Theory of Money gave this view its most famous expression: “inflation is always and everywhere a monetary phenomenon.” In this framework, money determines prices; real output is governed elsewhere. For a detailed discussion, see The Keynesian Revolution and the Monetarist Counter-Revolution.

As Keynesian policies were dismantled in the Reagan–Thatcher era, financial deregulation accelerated. The repeal of Glass–Steagall (1999) and the Commodity Futures Modernization Act (2000) expanded the scope of financial activity and contributed to the rise of shadow banking and shadow money. Over the same period, labor’s share of income declined while the share accruing to the top percentile rose. For a visual demonstration and discussion, see The Power of Economic Theory: Graphically Illustrated.

The historical record shows that economic doctrines do not ascend by argument alone. They are cultivated, funded, institutionalized, and strategically disseminated — often with support from those whose material interests they reinforce. For a discussion of how organized intellectual strategy shapes economic paradigms, see Romer’s Trouble with Macro.

The methodological debate within Economics focuses on the normative positive distinction, and typically asserts that Economics is positive – that is it describes the world around us. It is not normative – it does not describe what should be, or the ideal state Both of the labels miss the boat. Economics is actually performative: It shapes economic policies and institutions, and the economic realities of our lives.

Treating economics as an objective description of reality, and veiling the role of money, makes financial power structurally invisible, and is greatly beneficial to those who wield that power.

3. Two Logics of Economic Life

The neutrality of money persists because modern economics makes a prior modeling choice — rarely acknowledged.

As Marx observed, there are two fundamentally different logics of economic life.

The first is the logic of exchange:

Commodity → Money → Commodity (C–M–C′)

Goods are produced to obtain other goods. Money is a convenience — a bridge between commodities. Once exchange is complete, money drops out. Welfare is measured in consumption. In such a world, money does not drive the system; it merely lubricates it.

This is the architecture of most modern economic models. Arrow–Debreu general equilibrium theory is, in essence, a refined barter system. Utility maximization assumes that agents ultimately seek goods. Even profit maximization is translated into real magnitudes. Money sits on top of the “real” economy as a layer — not as a foundation.

But modern capitalism does not operate this way.

Its logic is different:

Money → Commodity → More Money (M–C–M′)

Money is not a bridge. It is the objective. Corporations invest to expand capital. Banks create credit to earn returns. Financial institutions measure success in monetary terms. Production becomes a vehicle for accumulation. Balance sheets, leverage, and liquidity are not side details — they are structural.

In an M–C–M′ system, money cannot be neutral. It organizes production, employment, and survival.

If we analyze an M–C–M′ economy using C–M–C′ assumptions, money will appear secondary by construction. The model has already decided that consumption is the goal and accumulation is incidental. (For a deeper discussion, see The Great Transformation of Economic Theory.)

Modern economics continues to describe capitalism as if it were an exchange system. It is not. It is a monetary production system.

Once that is recognized, the central questions change: Who creates money? Who directs credit? Who absorbs losses? Who decides which sectors expand and which collapse?

Those are the questions we turn to next.

4. Crisis, Debt, and Power

The Global Financial Crisis of 2008 did not begin with a productivity shock. It began with a collapse of mortgage credit and shadow banking. When credit stopped expanding, spending collapsed. Unemployment followed.

The economics profession was blindsided. The dominant models contained no meaningful role for banks, household balance sheets, or financial fragility. Financial intermediation was treated as a friction; debt was largely absent. As John Cassidy documented in “After the Blowup” , even as markets imploded, leading defenders of efficient markets struggled to fit events into their existing frameworks.

This was not a minor forecasting error. It was a structural blind spot.

The work of Atif Mian and Amir Sufi in House of Debt showed that regions with higher household leverage experienced deeper collapses. Consumption fell where debt burdens were greatest. The crisis was transmitted through household balance sheets — variables largely invisible in mainstream macroeconomic models. (For discussion, see: Why Does Aggregate Demand Collapse?)

But there is a deeper layer. As David Graeber argues in Debt: The First 5000 Years, debt is not merely a financial contract; it is a moral and political relationship. A debt-driven growth model shifts risk onto households while concentrating control over credit in financial institutions. High household indebtedness is not only macroeconomic fragility; it is an index of financial power. Indebted populations are economically disciplined populations.

If money were neutral, banking crises would not destroy employment. If debt were incidental, household leverage would not determine the depth of recessions. The GFC demonstrated that money and credit are not side details of capitalism — they are structural.

Once this is recognized, neutrality is no longer an innocent abstraction. It obscures the central mechanism through which modern economies expand, contract, and distribute power.

Which brings us to the unavoidable question: Who creates money?

5. Rebuilding Economics: An Invitation to a New Generation

The Global Financial Crisis did not simply expose a policy failure. It exposed a theoretical failure. Adding “financial frictions” to existing models does not solve the problem if the core architecture still treats money as secondary.

If capitalism is a monetary production economy, then macroeconomics must begin with money, credit, balance sheets, and institutional structure — not with representative agents maximizing utility in an abstract exchange world.

This is not a minor adjustment. It is a research frontier.

For students choosing MPhil or Ph.D. topics, the open questions are vast and urgent:

  • How does bank credit shape sectoral development?
  • How do household balance sheets transmit shocks?
  • What determines the allocation of liquidity across classes and regions?
  • How does monetary hierarchy shape global inequality?
  • How does rising household debt alter labor markets and political agency?
  • What institutional designs reduce financial fragility without suppressing productive investment?

These are not ideological questions. They are analytically demanding, empirically rich, and largely underdeveloped within mainstream frameworks.

A monetary economy requires a different methodology. Accounting identities are not bookkeeping constraints added at the end; they are the starting point. Balance sheets are not side details; they are the structure of the system. Institutions are not frictions; they are the architecture.

Paradigm shifts do not occur because established scholars are persuaded. They occur because new researchers choose different starting points.

You do not need to defeat the old framework. You can build the next one.

A monetary production economy requires a monetary economics. The task is not to repair the old structure. It is to construct what comes after it.

The Gold Dinar (Part 1): The Questions We Are Not Asking

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The gold dinar is more than a monetary proposal.

For many Muslims, it is a moral intuition: that money should be honest, disciplined, and protected from arbitrary power. It represents stability in a world of inflation scares, debt-driven fragility, and a dollar-centered order that feels structurally unfair. Even those who do not follow the technical debates often feel the appeal immediately—because the promise sounds so simple: tie money to something real.

That instinct deserves respect. It is responding to real harms.

But it is precisely because the instinct is powerful that we should be careful about what we mean when we invoke “gold” as a solution. After studying monetary history, Islamic monetary practice, and modern financial systems, I have come to think that the gold dinar debate often stays heated and inconclusive for a quiet reason:

Multiple Gold Standards

In the public imagination, the gold standard sounds like one clean regime. Historically it never was. The same slogan covered sharply different architectures—and the difference that mattered most was who actually got access to gold.

Interwar Britain “returned to gold” in 1925, but not as gold coins in everyday life. Convertibility was structured as bullion convertibility, with a very large minimum (400 troy ounces)—so gold access was effectively reserved for large actors, not ordinary households.

Keynes’ India shows another model: daily money was the rupee, external settlement ran through sterling, and sterling linked to gold—an institutional chain (rupee ↔ sterling ↔ gold) in which most people never touched gold at all.

And Bretton Woods placed gold at the apex: currencies fixed to the dollar, the dollar linked to gold, but convertibility functioned as a politically managed promise, not a public retail right.

Once you see this, “gold dinar” also stops being one proposal. Mahathir’s version was primarily an international settlement idea among states, while the Kelantan initiative pushed toward domestic circulation as an alternative to the ringgit—immediately colliding with the logic of central-bank monetary sovereignty.

These architectures don’t just differ; they can conflict. If gold must defend external settlement commitments under stress, systems conserve it—access narrows, redemption tightens, and gold is pulled upward into the apex. The same gold cannot simultaneously serve as a freely circulating domestic medium and as the scarce reserve asset for external defense.

Fiqh Confusions and Monetary Regimes

Another reason the discussion loops is that it often treats a fiqh question as if it settles an institutional design problem.

A separate confusion keeps the conversation stuck: people mix up a fiqh classification debate with a permissibility debate. Jurists may disagree about what qualifies as money proper for rules like ribā (rules on interest/usury), ṣarf (currency exchange rules), and zakāh (alms base)—whether that category is limited to gold and silver, extends to copper fulūs, or tracks whatever society widely uses. But that is not the same as saying people may not use tokens or fiat to buy and sell. In practice, ordinary exchange has always relied on subsidiary media, and modern “gold dinar” proposals themselves assume token layers for day-to-day trade. Once that is acknowledged, the real question is no longer “Are tokens allowed?” but how the token layer is governed and linked to any anchor—who issues, who can redeem, on what terms, and what happens under stress.

And the practical constraint is decisive. Modern exchange cannot run on full-bodied gold and silver coin alone. Daily transactions require low denominations, high velocity instruments, and increasingly, account-based and digital settlement. Monetary history reinforces this: commodity systems repeatedly struggled to supply “small change,” and functioning economies repeatedly developed subsidiary or token layers to make everyday trade possible.

Monetary Architecture

Once we accept that modern economies inevitably run on layered money, the debate cannot stop at the slogan “gold-backed.” The reason is simple: “a link to gold” is not one link. It can be built in several distinct ways, and those design choices generate different monetary systems with different economic properties—especially when the system is under stress.

We have already seen this in the history of “gold standards.” Some architectures make gold active in domestic money; others restrict gold to international settlement; others place gold behind an intermediate layer (a key currency) so it sits at the apex rather than in people’s hands; and still others treat the gold link as notional and politically managed. These are not minor variations. They differ on the very mechanisms that determine outcomes: how adjustment happens, how liquidity is supplied in crises, who bears the burden when reserves are strained, and whether convertibility is broad, restricted, or suspended.

This is why claims about what “the gold dinar” will deliver—stability, justice, discipline, crisis-proofing—remain floating until we specify the architecture. Without that specification, we cannot even tell which system is being proposed, let alone evaluate its promised properties. So these issues are not technicalities. They are the regime.

Why Gold Remains Morally Persuasive

If the practical question is architecture, why does debate remain so emotionally centered on gold itself?

Because gold carries moral symbolism that is difficult to overstate. It feels incorruptible. It cannot be created by decree. It appears to place an external restraint on rulers and financiers. When monetary disorder is experienced as abuse—devaluation, inflation, or seemingly costless money creation by the powerful—gold becomes a public shorthand for restraint, honesty, and justice.

But moral symbolism can also create a kind of architecture-blindness. When gold is treated as a moral guarantee, we may assume that any “link to gold” is essentially the same link, and that institutional details are secondary. Monetary history suggests the opposite. Gold-linked regimes repeatedly depended on governance choices at precisely the points people speak about least: conversion rules, access privileges, reserve defense, and crisis procedures.

Even where gold served as an anchor, societies still produced substitutes—notes, deposits, and other near-monies—because trade and finance demand instruments more flexible and convenient than the anchor itself. Under pressure, states and central banks frequently pulled gold “upstairs,” concentrating it for defense of external commitments, while narrowing domestic access. Later, these episodes are remembered as “departure from purity,” and reform movements call again for “return.” The cycle is structural, not merely moral.

The implication is not that gold is useless, but that gold cannot substitute for governance.

A More Productive Discipline

Instead of asking, “Are you for gold or against gold?” a more productive discipline is to work in the opposite order:

  1. Goal: What are we trying to achieve—escaping dollar dependence, preventing inflation, stabilizing purchasing power, aligning monetary practice with Sharīʿah objectives, or reducing financial fragility?
  2. Architecture: What architecture is being proposed to achieve that goal—domestic convertibility, international settlement arrangements, a gold‑exchange mediation layer, a notional apex link, or a narrower role for gold as savings and reserves?
  3. Trade-offs: What trade-offs follow—external constraints, crisis liquidity limitations, adjustment burdens, distributional consequences, and the governance institutions required to enforce restraint?

Gold may be useful in some designs, for some aims. But gold is not a program. It is a tool, and tools only work within systems.

In the next parts of this series, I will explore two questions that deserve calmer, deeper attention than they usually receive: first, what early Islamic monetary practice actually looked like (and what it does—and does not—imply for modern reform); and second, what a serious “post-slogan” Islamic monetary framework might require once we stop treating gold as a shortcut.

Rejecting gold as a shortcut does not mean accepting the status quo. It means raising the level of the conversation—from slogans to architecture—so that the moral energy driving these debates can be directed toward solutions that are institutionally real.

For a more detailed discussion, see my academic paper: The Gold Dinar Debate Reframed: Moving Beyond Slogans to Monetary Architecture. This series of posts will provide a broader discussion suited for general audience. The next post in this sequence is: Part 2: What Early Islamic Practice Really Teaches About Money.

How Monetary Myths Conceal Power

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Modern economics rests on a dangerous illusion: that abstract, universal laws—derived primarily from the European experience—can be applied across all societies, times, and contexts. This false assumption has allowed economists to present their theories as objective and value-neutral, masking the deeply political and historical foundations of economic life. In an earlier post Reclaiming Lost Narratives: A New Approach to Social Science., I argued that we must reject this illusion and return to the original, historically grounded and morally engaged vision of economics. This post illustrates that argument by tracing how mainstream theories about money conceal its true nature as an instrument of power.

A dramatic digital illustration showing a money printing machine on the left, operated by two fat, smug, cigar-smoking tycoons in suits and top hats. Printed currency flows continuously from the machine across the entire image. In the center, economists in lab coats crouch with microscopes, rulers, and compasses, intensely analyzing the currency with confused expressions. On the right, a crowd of impoverished people strain with their hands to lift the enormous sheet of currency, visually burdened by it. The background is dark, industrial, and grim, with lighting highlighting the tension between power, illusion, and oppression.

Prologue: Rethinking Finance from the Ground Up

Nobel Laureate Paul Romer has observed that standard economic theories about money are “wildly incorrect,” and that the doctrines on which they rest are “fundamentally flawed.” This level of ignorance is astonishing, given that money serves as the lifeblood of modern economies and profoundly shapes lives around the world. Yet, textbooks teach that “money is a veil”—and that to truly understand the economy, one must look through the veil and ignore money altogether. It is this striking disconnect between economics and reality that led to the Global Financial Crisis of 2007. At the University of Minnesota, the influential economist Edward Prescott reportedly taught his graduate students that “postal economics is more central to understanding the economy than monetary economics.” This raises a deep and troubling question: why do economists go to such lengths to downplay the role of money—when, in the real world, the adage “money makes the world go round” is far closer to the truth?

The myths surrounding money are not accidental—they conceal the deeper realities of power. At the heart of the monetary system lies a critical question: Who has the authority to create money, and in whose interests is that power exercised? The links between power and money are foundational to the functioning of capitalist economies. My paper, The Battle for the Control of Money, explores this hidden architecture of monetary power. It shows how money creation is monopolized by a small elite—primarily through private banking systems—who use it to serve their own interests, deepening inequality and reinforcing structures of control. Modern myths about money serves to legitimize existing power configurations, erasing the moral and political dimensions of economic life, and shields the mechanisms of domination from critical scrutiny.

Despite its central role in shaping economies, the process by which money is created remains one of the most carefully guarded secrets of modern finance. For decades, economics textbooks taught that banks are mere intermediaries—collecting deposits from savers and lending them to borrowers. In reality, private banks create the vast majority of money in the economy simply by issuing loans. This process of money creation “out of nothing,” as even the Bank of England acknowledged in a rare moment of candor, confers immense and largely unaccountable power on financial institutions. Yet, students are trained to ignore this. The mantra that “money is a veil” teaches economists to look through it—as if who creates money, how, and for what purpose were irrelevant technicalities. In fact, these questions lie at the heart of how modern capitalism concentrates wealth and power in the hands of a few. Many authors—including Thomas Piketty, in Capital in the Twenty-First Century—have documented the astonishing rise in inequality in recent decades. But the root causes remain elusive within mainstream frameworks, largely because they fail to examine the true source: the creation and control of money.

Technocratic Dreams and the Illusion of Apolitical Reform

Proposals to reform money often focus on technical designs, like replacing fractional reserve banking with full-reserve systems, or issuing gold- or silver-backed currency. These “technocratic dreams” imagine that monetary reform is a neutral, engineering problem, solvable through clever design. But such proposals ignore the foundational reality: money is power. Who controls its creation controls the economy—and by extension, society. As argued in my paper Technocratic Dreams, Political Realities, the failure of full-reserve banking proposals lies not in their mechanics but in their neglect of the political economy. Reforming money requires challenging entrenched interests and navigating complex institutional structures. This is why textbook definitions—money as a “medium of exchange” or “store of value”—are misleading: they erase power from the equation. Among Muslims, a common response is to advocate for a return to gold and silver currencies. But this too is a technocratic illusion. The power dynamics behind fiat money would simply reassert themselves through control over gold markets and international trade systems. The problem is not the material of money, but the structures of power behind it. A more detailed exploration can be found in the Technocratic Dreams paper, but the core insight is simple: no monetary reform can succeed without addressing the politics of money creation.

Rebuilding Economics on Moral Foundations

Once we recognize the deep entanglement between money and power, another puzzle of modern economics becomes clearer: how did economics lose its moral compass? The discipline began as a branch of moral philosophy—Adam Smith himself was a moral philosopher—but today it presents itself as a value-neutral science, akin to physics. This transformation was enabled by treating money as politically neutral, a mere “veil” that can be ignored. Once power is removed from the picture, questions of justice and ethics are no longer part of the conversation—they become the invisible background. My paper on the Normative Foundations of Scarcity demonstrates how seemingly objective economic concepts conceal underlying normative foundations.

Peeling back the veil of money reveals a troubling reality. In modern economies, money is not just a medium of exchange—it becomes the ultimate measure of value. The “good society” is defined by maximum GDP, and the “good person” by maximum wealth. In such a world, those who control the creation of money wield extraordinary influence over both economic outcomes and social norms. Any serious attempt to build a just economy must begin by recognizing—and then reining in—this power.

My paper, Reclaiming Economics as a Moral Science: An Islamic Approach to Monetary Reform (2025), addresses this challenge. It argues that the separation of facts from values has crippled economics, leaving it unable to grapple with core issues like justice, power, and ethical responsibility. Rather than trying to patch moral concerns onto a broken framework, the paper calls for reconstruction of economics as a moral science. Drawing on Islamic intellectual traditions, it envisions a discipline where spiritual and ethical principles are central—not peripheral. In this paradigm, monetary reform is not a technical adjustment but a moral project: one that seeks to align economic structures with divine guidance and collective well-being. An earlier paper entitled “Islam’s Gift: An Economy of Spiritual Development” also explains how we can rebuild economics on Islamic moral and spiritual foundations.

Responding to Evolving Configurations of Monetary Power

Monetary power is not static. It shifts in response to political, institutional, and technological changes. The Great Depression exposed the dangers of unregulated bank-led money creation, prompting reforms that temporarily curtailed financial excess and redistributed economic power more equitably. Later, the collapse of British dominance and the Bretton Woods agreement transferred global monetary power to the United States, establishing the dollar as the world’s reserve currency. Today, we are witnessing a new transition—from fiat money to digital and synthetic forms—further concentrating financial power and rendering Muslim-majority societies increasingly vulnerable.

Islamic economics has also undergone transformations in its attempt to cope with the dominant power of capitalism. The first generation sought to capture state power to implement an Islamic system from the top down. The second focused on adapting Islamic finance to capitalist institutions—often compromising its ethical foundations. Learning from both, the third generation calls for building power from the ground up—constructing institutions that reflect Islamic values while remaining responsive to contemporary global configurations of power.

Two recent papers offer complementary third-generation strategies. The first, Monetary Imperialism and Third-Generation Islamic Economics, focuses on diagnosing the problem: how changes in the architecture of global money—especially the shift from physical to synthetic, unregulated money—have eroded the sovereignty of Muslim societies. It traces how modern imperialism operates not through armies, but through financial systems that dictate the terms of economic life. The paper offers a moral and intellectual framework for reclaiming economic agency, rooted in the Islamic tradition and oriented toward community-based resistance.

The second, Islamic Finance and Community Empowerment: A Strategic Vision for the Global Ummah (COMCEC), takes these insights further by proposing a pragmatic path forward. It argues that top-down state reforms are unlikely to succeed, given the entrenchment of Muslim governments within global financial structures. Instead, it proposes a grassroots strategy based on two institutional pillars: Islamic Financial Institutions (IFIs) committed to a “dual bottom line” of profit and service, and mosque-based Khidmat al-Jama‘ah Organizations (MKJs) that deliver community services grounded in Islamic ethics. By coordinating these structures and linking local efforts across borders, the paper envisions a decentralized, transnational network capable of rebuilding Islamic economic life from below.

Together, these two papers chart a coherent path: understanding how monetary imperialism works, and outlining how a morally grounded, community-based strategy can counter its effects.

The Path Forward

The papers linked above chart my progress in understanding the links between money and power over the past few decades. A longer post entitled “Countering Financial Capitalism: An Islamic Journey Through the Hidden Architecture of Money” provides a more detailed discussion of these topics. Nonetheless the most important task remains undone: how can we use this understanding to counter financial power over the Islamic world created by the monetary institutions currently dominant. Some suggestions have been made in the two papers listed in the previous section, but a lot of work remains. Once we understand that money creation confers immense power, and that we cannot isolate ourselves from the effects of this power, there seems to be only one solution: we must create our own money. Proposals to revive the gold dinar or silver dirham aim at monetary independence, but they do not recognize the links to power and the fact that most of the world’s precious metals are already held by powerful elites. Such reforms risk entrenching the very power they seek to challenge. A better alternative would be a labor-based currency, calibrated to the widespread availability of unskilled labor in many parts of the Ummah—a tragic but undeniable reality. Developing such systems requires careful analysis of local community currency models that can operate within the diverse regulatory and political contexts of the Muslim world. Also, it would be essential to link these inititiatives around the globe, so as to create the strength required to combat global capitalism. This is the focus of my current research.

Ruthless Modernity: The Secrets of Global Conquest

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This blog is a brief summary of a more detailed academic article: Ruthless Modernity: A Moral History of the West. See also, more detailed blog post: The Mask of Objectivity: How Social Science Shapes Society.

{bit.ly/AZrms} In the late 19th century, Belgian investors were earning steady returns on a booming new commodity: Congolese rubber. On the ground, the reality behind those profits was something else entirely—villages razed, limbs severed, quotas enforced at gunpoint.

And yet, in the financial districts of Brussels and Antwerp, there were no signs of blood. Only dividends.

This pattern—of brutality rendered invisible by distance, by bureaucracy, by financial abstraction—was not an aberration. It was part of a much larger system that powered Europe’s global ascendancy. That ascendancy is usually attributed to Enlightenment reason, scientific progress, and liberal institutions—a self-congratulatory story retold in textbooks, histories, and memoirs.

Our article on “Ruthless Modernity” offers a different account. It traces how conquest was made profitable, how stock markets fattened on a feast for crows, and how entire empires were built on the transformation of moral decisions into economic instruments.

As the African proverb says: Until the lions learn to write, tales of the hunt will glorify the hunter. For centuries, Europe has told the story of its own rise as a civilizing mission. This article gives voice to those they “civilized.” It shows how conquest was sanitized, how finance abstracted suffering into profit, and how the vocabulary of progress was used to erase the cost in human lives.

It argues that Europe’s real advantage lay not just in its technology or science, but in its ability to turn violence into a sustainable business model—and to mask that violence behind ledgers and liberalism.

One of the most powerful tools in this transformation was the partnership between governments and wealthy elites. Instead of taxing citizens to fund war, states borrowed money from financiers. In return, investors received interest payments guaranteed by future taxes. The Bank of England, bond markets, and joint-stock companies were not invented to regulate economies—they were invented to make war pay. Investors did not see corpses. They saw dividends.

And war was only part of it. Europe also pioneered a global trade soaked in violence—later sanitized in textbooks as “the triangular trade.” Human beings were bought and sold like cargo. Scientific innovation was directed toward more efficient weapons. Morality itself was repurposed to serve the new economy. Slavery became civilizing. Profit became patriotic. And financiers calculated the costs and benefits of war as if balance sheets could measure the worth of destroyed cultures, ruined ecosystems, and shattered lives. The ledgers tallied profits—but ignored the true cost borne by humans, animals, and the biosphere.

To keep this system running, capitalism required more than tools. It required stories. New narratives were crafted—ones that framed exploitation as development, and genocide as the spread of civilization. These weren’t just masks—they were lullabies. Carefully composed to soothe Europe’s conscience while the machinery of plunder kept spinning.

Our full article on Ruthless Modernity: A Moral History of the West digs deeper into this history.    Not the official chronicles, but the records buried under euphemisms, profits, and power. It is not a manifesto – It’s a flashlight. It begins to uncover the hidden mechanics of modern institutions—the quiet ways in which they erased moral agency and turned mass suffering into economic efficiency.

This isn’t just about the past. It’s about the systems we still live within. It’s about student loans, stock markets, and climate change. It’s about why the poor are blamed and the powerful are praised. It’s about why horrors continue in plain sight—wars, displacements, starvation—while markets rise and pundits applaud.

Speaking truth to power is liberating. Like the rising sun, truth dispels darkness—unmasking tyrants and restoring the voices of the silenced.

Related Materials:

Money, Power, and the Islamic Path to Justice

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My comments on Qanit Khaleelluah’s proposal for full reserve banking were presented at a video conference organized by Pakistan Economic Forum (PEF) on Sunday 23rd March 2025. I tried to cover too many topics in depth in a very limited amount of time. As a result, the main messages of my talk did not emerge clearly. I have written the blog post below to clarify what I had intended to say in the talk. The video discussing the proposal and my comments is linked below, but my intent and meaning will be clear only after reading the blog post here.

1. Introduction: Why This Conversation Matters

In recent years, growing dissatisfaction with modern monetary systems has led many Muslims to call for a return to gold and silver currencies. These calls are based on a deeply felt belief that Islam mandates the use of precious metals as money, and that the evils of our current financial system — inflation, inequality, exploitation — can be traced back to fiat currency and interest-based banking.

It was in this context that Qanit Khaleelullah presented a bold and technically sound proposal to move from a fractional reserve banking system to a full reserve system. His proposal offers a way to stabilize Pakistan’s financial system, reduce debt-based money creation, and restore some degree of justice and transparency.

I had the opportunity to comment on this proposal in a recent talk. While I praised the technical aspects of the plan, my main concern was that it ignores a central issue: money is not just a technical tool — it is a source of power. And unless we understand how money functions as a tool of power within capitalist economies, and who controls it, we cannot meaningfully reform it.

In my talk, I tried to connect many different themes: the nature of money, the history of its control, the relationship between capitalism and Islamic economics, and the broader issue of power dynamics. But with limited time, and without clear transitions in my slides, the connections were not obvious to the audience.

This blog post is an attempt to clarify the core message behind that talk. My goal is to explain:

  • Why the call to return to gold is understandable, but ultimately misguided in today’s context,
  • Why full reserve banking, though better than the current system, is not enough to solve our deeper problems,
  • And what kind of change is truly needed — a change in who controls money, and for what purpose.

Let us begin this journey by examining one of the most common beliefs among Muslims concerned with finance: that returning to gold will solve our problems.

2. The Gold Illusion: Why It Cannot Fix Modern Monetary Problems

Among Muslims who are deeply concerned about the injustice of modern financial systems, one solution is often repeated: we must return to gold and silver as money. This view is rooted in a sincere desire to restore what is seen as the pure and just economic system of early Islam. After all, the Quran and Hadith mention dinar and dirham, and for centuries, Muslims used gold and silver coins in daily trade. Doesn’t this prove that Islam endorses gold as the proper form of money?

This belief leads many to reject any discussion of monetary reform that does not involve abandoning fiat currencies entirely. In their view, any proposal — such as full reserve banking — that retains fiat money is simply a cosmetic fix that ignores the real source of the problem.

This concern deserves to be taken seriously. However, it is important to understand that the world we live in today is very different from the world in which gold-based money once worked successfully. The key difference lies in the nature of the economy itself.

Traditional Islamic societies were not built on the logic of profit, growth, and endless production. People’s needs were met through strong social bonds, mutual support networks, and local markets that served communities. In such economies, gold and silver could serve effectively as money, because economic activity was relatively stable, and the supply of money did not need to constantly grow.

Modern capitalist economies, by contrast, are fundamentally different. They depend on constant expansion — of production, consumption, investment, and credit. This is not optional; if growth stops, the entire system begins to collapse. And this type of system cannot function on a fixed supply of gold or silver. There simply isn’t enough of it, and it cannot be created or expanded to match the pace of economic growth.

In capitalist economies, money must be flexible and scalable — it must grow with the economy. That’s why all modern economies, including those of the Muslim world, operate on fiat currencies. Without fiat money, modern economies would grind to a halt.

So, if we truly want to return to using gold as money, we cannot just change the currency — we must change the entire economic system that depends on a different kind of money. We must first abandon capitalism and rebuild a different kind of society — one based on Islamic principles, social cooperation, and ethical governance.

This does not mean the desire to use gold is wrong. It means that before we can bring it back, we must understand the structure of the system we are trying to reform — and what would need to change for gold to become a viable option once again.

3. Capitalism, Money, and Power

To understand why gold cannot solve the problems of the modern monetary system — and why full reserve banking may not either — we need to understand something deeper: what role money plays in a capitalist economy.

In traditional societies, money was a tool — something people used to facilitate exchange. It played a supporting role in the economy, which itself was built on social relationships, shared responsibilities, and community welfare. In such a system, money served the people.

But capitalism reversed this relationship. In capitalist economies, money is no longer a servant — it has become the master. It is no longer just a medium of exchange. It has become a source of power.

Capitalist economies depend on continuous growth. Factories must keep producing, businesses must keep expanding, and consumers must keep spending. To make this possible, money must be constantly available in increasing amounts. But here is the critical point: whoever controls the creation of money controls the entire system.

In the modern world, most money is not created by governments. It is created by private banks through a process called fractional reserve banking. When a bank gives a loan, it does not hand out money it already has. Instead, it creates new money — simply by writing numbers into an account. This means that private banks have the power to create money out of nothing — and charge interest on it.

This is where money becomes power. With control over money creation, financial institutions can:

  • Decide who gets access to credit (and who doesn’t),
  • Shape the direction of economic growth,
  • Accumulate wealth without producing anything of real value,
  • Influence governments, policies, and even international relations.

This power is not accidental. It is built into the very structure of capitalism. And because of this, any reform that keeps this system intact — whether it uses fiat or gold, or adopts full or fractional reserves — will ultimately fail to address the root problem: the concentration of power in the hands of those who control money.

This is why we must not focus only on the form of money. We must look at who creates it, why, and for whose benefit.

Islamic economics offers a completely different vision — one where money serves the people, not the powerful. But to move toward this vision, we must first understand just how deeply capitalism has shaped our world — and why a technical fix is not enough.

4. Islamic Economics: A Different Vision

When Muslims confront the injustice of modern capitalism — the widening inequality, exploitation, and spiritual emptiness — many instinctively turn to Islamic teachings for guidance. But over time, different generations of Islamic economists have taken different paths in their efforts to articulate what an Islamic alternative to capitalism might look like.

4.1 The First Generation: Revolutionary Idealists (1950–1975)

The earliest generation of Islamic economists emerged in the wake of colonial liberation. Thinkers like Maulana Maudoodi, Allama Baqir Sadr, and Sayyid Qutb believed that the economic systems of the West — capitalism, socialism, communism — were all man-made and flawed. Their aim was not reform, but replacement. They sought to construct an Islamic economic system from the ground up, one that embodied the moral and spiritual teachings of Islam and promoted justice, equity, and communal welfare.

However, the dream of building Islamic societies was thwarted by the post-colonial reality: newly independent Muslim states retained the political and economic structures inherited from their colonizers. Efforts to bring about revolutionary change failed, largely because the ruling elites remained tied to global capitalist interests. As a result, the first generation’s vision — though noble — could not be implemented on a national scale.

4.2 The Second Generation: Reformers Within the System (1975–2010, and still dominant today)

Disappointed by the failure of revolution, the second generation adopted a more pragmatic approach. They aimed to “Islamize” capitalism, working within the existing economic framework to remove interest, promote zakat, and develop Islamic banking and finance. This period saw the institutional growth of Islamic finance around the world.

But this approach came with compromises. Instead of challenging the capitalist foundation, the second generation accepted many of its core assumptions — including the idea of the self-interested, utility-maximizing individual. In practice, Islamic finance often ended up mimicking conventional finance, with only surface-level differences. Critics within the field began to voice concern: had Islamic economics lost its soul in trying to fit into a system it was supposed to transform?

4.3 The Third Generation: Building from the Ground Up (2010 onward)

The 2008 Global Financial Crisis exposed the deep flaws in Western economic theories — flaws that the second generation had too often accepted as “scientific truths.” This crisis prompted a rethinking, and a return to the original revolutionary spirit — but with new strategies and more realistic goals.

The third generation recognizes that:

  • Capitalism and Islam are fundamentally incompatible,
  • Revolutions at the national level are unlikely to succeed,
  • And meaningful change must begin at the community level, not with state power.

Instead of seizing political control or modifying capitalism, this generation seeks to build ethical, people-centered institutions that reflect Islamic values — starting with families, communities, and local economies. The focus is on action where we already have influence, creating models of economic justice and cooperation that can grow organically and eventually offer a true alternative.

5. The Chicago Plan and Its Limitations

The proposal by Qanit Khaleelullah to adopt a full reserve banking system is not entirely new. It reflects an idea that has been considered for nearly a century — most famously in the form of the Chicago Plan, proposed by prominent American economists during the Great Depression of the 1930s.

To understand the significance — and the limitations — of such proposals, it helps to look briefly at the history behind them.

5.1 The Origins of the Chicago Plan

In the early 20th century, repeated financial crises rocked the global economy. These crises were often caused by excessive credit creation by private banks during economic booms, followed by collapses when the system could no longer sustain the debt. In response to the 1929 crash, some economists proposed a radical reform: take away the banks’ ability to create money, and make them operate only as custodians — holding 100% reserves against deposits.

This would mean that banks could no longer lend out money created “out of thin air.” All new money would have to be created by the state, which could then direct it toward the public good. The Chicago Plan was, in essence, a power-sharing formula — a way to restore balance between public interest and private profit.

5.2 Modern Revival: The Iceland Plan

After the 2008 Global Financial Crisis, the idea of full reserve banking resurfaced — this time in places like Iceland, where the private banking sector had collapsed spectacularly. The Iceland Plan built on the Chicago Plan’s ideas, arguing that money creation should be a public function, not a private business. By removing this power from banks, the state could stabilize the economy and direct money toward social needs.

Qanit’s proposal fits within this intellectual tradition. It seeks to address the dangerous consequences of private credit creation — including inflation, inequality, and financial instability — by giving the state greater control over money creation.

5.3 But Here’s the Problem

While the technical logic of the Chicago Plan is sound, it makes one huge assumption: that the government will act in the public interest.

In theory, if we give the state the exclusive right to create money, it will do so for the benefit of the people — investing in education, health, infrastructure, and welfare. But in practice, especially in countries like Pakistan, this assumption breaks down. Our experience with state-controlled banks — particularly during the nationalization era — shows that when politicians gain access to cheap money, it often leads to massive corruption, favoritism, and misuse of funds.

In other words, shifting money creation from private banks to the government does not guarantee justice. It simply shifts power from one elite group to another — both of whom may be equally unconcerned with the welfare of ordinary people.

In fact, a determined government could already achieve most of what full reserve banking promises, even within the current system, by using existing regulatory powers or nationalizing the banks. But again, the problem is not the tools — it is the will and integrity of those who wield them.

So while the Chicago Plan offers a technically viable fix, it ignores the deeper problem: money is power, and neither the state nor the financial elite can be trusted to wield that power ethically without serious structural and moral reform.

This leads us to an uncomfortable but necessary question: If we can’t trust the banks — and we can’t trust the state — then who should control the money?

We’ll explore that in the next section.

6. The Real Question: Who Should Control Money?

Once we recognize that both the government and the financial elite have used money to serve their own interests — rather than the public good — we are forced to confront a deeper question:
Who should control the creation of money?

It is tempting to look for technical solutions — whether it’s the Chicago Plan, full reserve banking, or a return to gold — and assume that the problem lies in the system itself. But history shows us something sobering:
The same system can produce good or evil, depending on who is in charge.

Private banks, driven by profit, create money in ways that fuel debt, speculation, and inequality. Governments, in theory, have the power to redirect money toward public welfare — but in practice, many have been captured by elites or international institutions, and have repeatedly failed to act in the public interest.

This raises a key insight:

The question is not just about how money is created — but by whom, and for what purpose.

In Pakistan, for example, the State Bank already has considerable legal authority to guide lending, enforce priorities, and even direct credit toward specific sectors. But this power is rarely used for the public good. As the historical example of Japan shows, governments can use existing institutions to plan and guide economic growth — by enforcing lending targets that support national development and welfare. Japan achieved phenomenal growth using this strategy.

So why has this not happened in Pakistan or other Muslim countries?

Because those who currently hold power — whether in banks or in government — do not see serving the people as their mission.

This brings us to the real core of the issue:
If we want a just and stable financial system, we must find or create agents who are truly committed to the welfare of the people.

Until we do that, any technical fix — no matter how elegant or well-designed — will either be blocked, distorted, or co-opted by those in power. And if those in power are corrupt, no reform can succeed.

So instead of asking only how to reform money, we must ask:
Who should we entrust with the power to create it? And how can we make sure they serve the people — not themselves?

That’s the question we turn to next.

7. A New Strategy: Building Islamic Banks for the People

If neither the state nor the financial elite can be trusted to create money for the public good, then what is the alternative?

The answer begins with a shift in strategy — from seeking top-down reform to building bottom-up institutions that are rooted in Islamic values and committed to serving the people.

This is the essence of the third generation of Islamic economics:
Instead of trying to Islamize capitalism, or capture political power through revolution, we must build ethical financial institutions within the existing system — institutions that embody Islamic principles and empower communities from the ground up.

7.1 Rethinking Islamic Banks

Today, most so-called Islamic banks operate on the same logic as conventional banks. Their primary goal is profit, not public service. They may avoid riba (interest) on paper, but their deeper structures often reflect the same priorities and behaviors as capitalist institutions.

What we need is a new vision for Islamic banking — one that redefines what it means to be truly “Islamic.”

At the heart of this new vision is a simple but radical idea:

An Islamic bank must exist to serve the people — not to profit from them.

To make this happen, we must:

  • Shift the motive of Islamic banks from profit maximization to public welfare,
  • Involve Ulema and scholars in setting ethical standards — so that the label “Islamic” is not just a legal technicality, but a meaningful commitment,
  • Develop dual bottom lines: one measuring financial performance, the other measuring impact on the community — and make both publicly visible.

This is not just idealism. It’s a transitional strategy — a way to move gradually toward a more just economic system, using tools we already have.

7.2 A Three-Way Partnership

One powerful model for Islamic money creation could look like this:

  1. Communities identify real needs — housing, small businesses, education, local services.
  2. Islamic banks provide interest-free credit, guided by ethical principles.
  3. The State Bank and government support this ecosystem with regulation, liquidity, and infrastructure.

This is not about confrontation with the global system. It is about building an alternative, step by step, in the spaces where we already have room to act — in our families, neighborhoods, mosques, and local institutions.

This vision may seem small compared to grand national plans. But history shows that big changes often begin in small places, with committed people doing quiet but transformative work.

And that’s where the final part of our journey takes us: reclaiming power by building where the powerful cannot reach.

8. Conclusion: Reclaiming Power, Gently

Throughout this journey, we’ve explored many layers of the modern monetary system — from gold and fiat currency to full reserve banking and Islamic alternatives. But at the heart of it all lies one simple truth:

Money is power. And if we want justice, we must ask: who holds that power — and for what purpose?

The failure of both capitalist banks and corrupt governments to serve the people is not just a technical flaw in the system — it is a failure of ethics, purpose, and responsibility. That’s why technical reforms, however well-designed, cannot succeed on their own. Without a transformation in values and vision, they will be blocked, co-opted, or turned into new tools of exploitation.

But this realization is not cause for despair. It is the beginning of a different path — one that does not wait for permission from above, or rely on revolutions from below.

It begins where we already have agency:

  • In our families and homes, where economic choices can reflect Islamic values,
  • In our communities, where we can support ethical finance, local enterprise, and mutual aid,
  • In our institutions, where we can demand that “Islamic” banking actually serves the public good.

This is the spirit of Third Generation Islamic Economics: not confrontation, not compromise, but construction. It is about building ethical alternatives within the space that remains, reclaiming control over money not through force, but through service, sincerity, and community.

We don’t need to change the world all at once. We need to start creating small models that reflect our values — and then allow them to grow. Real power does not come from controlling others. It comes from serving with integrity, from aligning our actions with our beliefs, and from placing our trust in Allah.

As the Quran promises:

“And those who strive in Our cause — We will certainly guide them to Our paths.” (29:69)

May Allah guide us to paths of justice, wisdom, and mercy — and help us rebuild our economic lives in a way that reflects His light.

POSTSCRIPT: Slides for the talk can be downloaded from: https://tinyurl.com/IslamicMoney The slides provides links to books, articles, and posts which support the claims made in the talk, and in the article above. One paper which is especially relevant is:

Zaman, Asad, Islamic Finance and Community Empowerment: A Strategic Vision for the Global Ummah (November 01, 2024). COMCEC 40th Anniversary Special Edition, Nov 2024, p182-192, Available at SSRN: https://ssrn.com/abstract=5087689

Exploring Three Generations of Islamic Economics

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This talk was delivered as part of the “Islamic Economics Literacy: Muamalah Series,” a program organized under the BSI Scholarship Inspirasi initiative by BSI Maslahat and Bank Syariah Indonesia. Held on11 Jan. 2025, the session aimed to provide awardees—students from various universities across Indonesia—with foundational insights into Islamic economics. This effort is part of a broader initiative to cultivate future leaders equipped to advance the Islamic finance sector in Indonesia, reflecting the rapid growth and increasing importance of this industry. Addendum: A recent, expanded version: The Third Generation of Islamic Economics: From Nations to Neighborhoods.

The Co-Evolution of Societies and Theories

The lecture began by explaining that societal theories evolve alongside societies themselves. Social theories, like economic systems, are shaped by historical and cultural contexts. For example, Western economic theories emerged during Europe’s Industrial Revolution to address specific challenges of the time. Yet, these theories claim universality, overlooking the diversity of human societies; see, The Puzzle of Western Social Science.

This flawed assumption of universality stems from the trauma of World War I, which led Western thinkers to reject qualitative, historical approaches in favor of “scientific” methods. However, unlike natural sciences governed by immutable laws, human societies are dynamic and shaped by free choices made by human beings. Applying rigid scientific methodologies to social sciences is fundamentally flawed.

It is also true that Islamic economics must also be seen as a contextual response to historical challenges. It is not static but continuously adapts to the evolving needs of Muslim societies.

Why Islamic Economics Emerged in the 20th Century

A key question addressed in the lecture was why Islamic economics, a discipline rooted in Islamic teachings, only emerged in the 20th century. The answer lies in the historical context of colonization. By the early 1900s, 90% of the Islamic world was under European control. The devastating impact of World Wars I and II weakened colonial powers, sparking independence movements. For more details, see Two Puzzles About Islamic Economics

During this period, the first generation of Islamic economists (1GIE) positioned Islamic economics as part of the ideological struggle for liberation. Their vision promised an equitable economic system built on justice, welfare, and Islamic principles—a stark contrast to the exploitative colonial systems.

The Challenges and Failures of 1GIE

Despite its revolutionary vision, 1GIE was unable to achieve its goals. There are two main reasons for this:

  1. Colonial Legacy: Colonizers left behind Westernized elites (“coconut class”) who continued colonial policies post-independence.
  2. Global Power Structures: The global capitalist system, supported by powerful Western nations, suppressed efforts to implement Islamic economic systems.

These realizations led to a shift in focus of political efforts. After having achieved independence from the colonizers by 1950s, Islamic thought leaders sought to wrest control of the governmental apparatus from the Westernized elites, by peaceful or violent means.

The Birth of 2GIE and Its Limitations

By the 1970s, political Islam had failed to secure control, prompting a second generation of Islamic economists (2GIE) to rethink their strategy. Instead of revolutionary change, they sought to gradually modify capitalism towards an Islamic economic system. This approach, however, proved problematic.

Capitalism and Islamic economics are fundamentally incompatible. While capitalism prioritizes individualism, greed, and competition, Islamic economics emphasizes social responsibility, generosity, and cooperation. The global financial crisis of 2007 highlighted the failures of both mainstream economics and 2GIE, leading to widespread disillusionment with both. See Crisis in 2nd Generation Islamic Economics

The Paradigm Shift: Third Generation Islamic Economics (3GIE)

The third generation of Islamic economics (3GIE) was born out of the lessons learned from the failure of both 1GIE and 2GIE. Decades of efforts showed that global Capitalism is too powerful to be directly challenged at the nation-state level. 2GIE pointed the way towards micro-level efforts that could create systemic change, instead of strengthening the hold of capitalism in Islamic countries. The key lessons are to change the locus of efforts. In Microeconomics, we should focus on communities instead of individuals. In Macroeconomics, we should focus on efforts for unity at the level of the Ummah, instead of the nation-states created to divide the Ummah. The heart of capitalism is overproduction, overconsumption, and excess labor required for both. To counter it, we need to adopt Simple Lifestyles: Encouraging minimal consumption, reduced production, and less labor. This will give us the time to build communities and global networks to connect the Ummah. The Quran testifies that the brotherhood of Ansar and Mohajireen created bonds of love which could not be purchased by all the treasure of the world. Today, uniting the Ummah should be the central focus of our efforts.

Policy Recommendations for 3GIE

The lecture emphasized actionable strategies to implement 3GIE principles:

  1. Rebuilding Communities: Strengthen families, masajid, and local neighborhoods as cornerstones of Islamic societies. Expand the roles of mosque committees to include social services like education, healthcare, and food distribution.
  2. Transforming Islamic Banks: Shift the mission of Islamic banks from profit maximization to community service. Introduce a dual bottom line that tracks both financial performance and social impact.
  3. Encouraging Self-Reliance: Foster urban-rural collaborations where city communities support rural farmers directly, bypassing exploitative intermediaries.
  4. Promoting Trust-Based Financial Systems: Revive historical models like the hawala system, rooted in trust and cooperation, to facilitate trade and financial transactions without relying on exploitative modern banking systems.

Networking Beyond Communities

The lecture stressed the importance of connecting local initiatives to regional and global networks. Islamic economics can foster collaboration through educational exchanges, trade partnerships, and skill-sharing programs. For example, expertise from Turkey could help Pakistan’s budding olive industry. This, and many other such initiatives, can be launched at the level of communities, without going through the governmental apparatus. The ultimate goal is to build solidarity across the Ummah, transcending the artificial boundaries of nation-states created during colonial rule.

What You Can Do as Individuals

The lecture concluded with practical advice for students and young professionals:

  1. Educate Yourself: Learn about 3GIE principles: see 3rd Gen IE
  2. Start Small: Initiate local projects in your community or masjid to address immediate needs.
  3. Lead by Example: Adopt a simple, sustainable lifestyle that reflects Islamic values.
  4. Spread Awareness: Use social media and community events to share knowledge and inspire others.

A Call to Action

Islamic economics is more than a theoretical framework; it is a call to action rooted in faith, justice, and love. By focusing on community-driven change and rejecting exploitative systems, 3GIE offers a pathway to create a just and equitable society. Small steps can lead to big transformations. It begins with individuals, grows through communities, and ultimately strengthens the Ummah as a whole.

ZOOM Lecture Recording: https://www.youtube.com/watch?v=cXV205GE8vs

These Slides: SRIBD: bit.ly/SCE3GIE Slideshare: https://www.slideshare.net/slideshow/exploring-three-generations-of-islamic-economics-decolonizing-knowledge-rebuilding-communities-and-the-3gie-paradigm/284291068

Writeup of Lecture: bit.ly/AZE3GIE

Reimagining Economics: Historical Sensitivity and Human Welfare as Core Principles

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On September 24th, 2024, at a seminar arranged by Ankara Yıldırım Beyazıt University (AYBU) and Institute for International Relations and Strategic Research (ULISA | IIRSR) & Econometric Research Association, I discussed research opportunities for students created by addressing two major methodological flaws in modern economics. These flaws are rooted in historical shifts in economic thought. They have constrained the discipline’s ability to address real-world challenges. The original talk, and a summary, can be accessed from: “Breaking the Boundaries in Economics: Rediscovering the Roots of Human Welfare“. In this post, I discuss the two flaws, framed as two puzzles, more deeply. 

Puzzle 1: Is Western Social Science Universally Applicable to All Societies?

Social theories, much like policies, are deeply shaped by the specific societies they aim to describe. A theory that thrives in one context often fails disastrously in another. For instance, while State-Owned Enterprises (SOEs) have driven decades of phenomenal growth in China, they have been a significant economic burden in Pakistan. For a detailed discussion, see Privatization of SOEs: Islamic Views. This context-dependent nature of social theories makes the bold claim of Western Social Science to universal applicability not only questionable but also fundamentally flawed.

Western social sciences emerged in response to Europe’s unique historical experiences. Centuries of religious warfare between Catholics and Protestants created a need to build secular theories that would be equally acceptable to all Christian factions. As Peter Manicas observes in A History and Philosophy of the Social Sciences, the social sciences emerged in the early 20th century based on a misguided attempt to emulate the physical sciences. A previous post on The Grand Deception: Social Science discusses eight authors who call for rebuilding the social sciences on new foundations. Historical context explains both the emergence of modern social science, and its wrong foundations. A detailed discussion of this historical context is given in Chapter 2 (Draft) of my forthcoming textbook. Briefly, World War I dramatically lowered the prestige of traditional historical and qualitative approaches to studying human society, replacing them with a mathematical, quantitative, and empirical methodology designed to mimic the successes of physical sciences. While this approach appears precise and scientific, it remains profoundly unsuitable for the study of human societies. This methodological misalignment not only undermines the validity of social sciences but also raises two critical puzzles:

1. Why do European intellectuals claim universal applicability for social science?

Centuries of warfare led to advancements in weaponry and the erosion of moral constraints, fueling European colonization of the globe. European societies, having abandoned religion as a moral compass, adopted a view of humanity as governed by survival of the fittest. This perspective justified the conquest and exploitation of other civilizations, which were often technologically advanced but politically fragmented or declining. For more details see Central Myths of Eurocentric History. As Edward Said argues in Orientalism, this era of colonization fostered a sense of superiority in the West, leading to the assumption that European civilization—and its social sciences—represented the pinnacle of human progress.

This assumption is demonstrably false. Claims of civilizational superiority were often used to justify atrocities, such as colonial violence and genocide. More recently, similar rhetoric has been deployed to justify the destruction of Iraq or ongoing support for Israeli genocide of Palestinians. These actions, premised on the supposed moral and intellectual superiority of Western frameworks, reveal the destructive consequences of flawed Western social theories.

2. Why do non-European societies accept the applicability of Western Social Sciences?

The global dominance of Western powers and their intellectual hegemony, reinforced by colonialism, have deeply influenced non-European societies. Indigenous knowledge systems were systematically devalued, while Western frameworks were presented as universal. Even today, the awe-inspiring achievements of Western physical sciences often lead to an uncritical acceptance of their social sciences, despite stark differences in methodology and outcomes.

The contrast between physical and social sciences is telling. Physical sciences have revolutionized human life through universally applicable technologies, transforming every aspect of our existence. In stark contrast, social sciences have often contributed to conflict, environmental degradation, and widespread social alienation. The increasing rates of loneliness, despair, and suicide in modern societies underscore their failure to enhance human welfare. Many authors have recognized the flawed foundations of modern social sciences, and called for rebuilding them afresh, on new foundations. For references, see The Puzzle of Western Social Science.

Puzzle 2: Does Money Buy Happiness?

Modern economics assumes that humans act as rational agents seeking to maximize happiness through material consumption. This perspective equates increased wealth with greater happiness. However, this view is fundamentally flawed, as it overlooks the fleeting nature of pleasure from material goods and neglects the deeper, more enduring sources of human well-being (The Secrets of Happiness).

The Easterlin Paradox reveals that beyond a certain threshold, additional income and consumption do not lead to sustained increases in happiness. Despite significant increases in wealth over time, average happiness levels have remained relatively stagnant. Instead, the relentless pursuit of material wealth often traps individuals in a cycle of desire and short-lived satisfaction, without contributing to long-term well-being.

In contrast, lasting happiness arises from character development and strong social relationships. Cultivating virtues such as gratitude, contentment, and compassion not only enhances personal well-being but also fosters positive interactions with others. Social connections provide emotional support, a sense of belonging, and opportunities for meaningful engagement—key ingredients for long-term happiness. See Can Money Buy Happiness?

Research consistently shows that individuals with robust social ties enjoy better mental and physical health, including lower rates of anxiety and depression, stronger immune systems, and longer lifespans. These findings underscore the value of investing time and effort into relationships rather than fixating on material accumulation. A study by Holt-Lunstad et al. (2010) found that strong social relationships improve survival rates by 50%, highlighting the profound impact of social connections on longevity. Furthermore, social ties contribute to reduced physiological stress responses and improved mental health outcomes (Umberson & Montez, 2010).

Moreover, a culture centered on consumption can lead to broader societal harms, such as environmental degradation and growing inequality. Shifting our focus from materialism to personal growth and community building allows us to create a more sustainable and equitable world while enhancing individual well-being. De-Growth Economics builds on this recognition, advocating for simpler lifestyles that not only promote greater happiness but also represent our best hope of averting the looming climate catastrophe. See: Gasparro (2024) Book Review: The Future Is Degrowth. A Guide to a World Beyond Capitalism.

A Path Forward

The core of economics is, or ought to be, understanding how material resources can be used to improve human lives. However, modern economics has strayed far from this purpose. Blind to the roots of welfare and indifferent to cultural and historical differences that shape conceptions of identity, goals, and happiness, it reduces humanity to identical robots programmed to maximize consumption. This reductive and dehumanizing framework is incapable of addressing the complexities of human welfare and can lead only to disaster.

These foundational flaws leave us with no choice but to rebuild the discipline entirely. Economics must be reconstructed on principles that recognize the diversity of human experiences and the centrality of moral and cultural values. This reimagined framework should prioritize improving human welfare over abstract mathematical models and mechanistic assumptions.

The upcoming textbook, “Third Generation Islamic Economics,” seeks to address these challenges by offering a vision for economics grounded in Islamic epistemological and moral foundations. It invites readers to rethink the discipline in a way that aligns with the realities of human life and the ethical imperative to build just and sustainable societies.

If you’re intrigued by these ideas, I encourage you to join my mailing list here: http://bit.ly/AZIEML . Subscribers receive motivational insights, links to draft chapters, and updates on the progress of this transformative project. This post will be featured in the next email, offering an opportunity to further explore these critical issues.

Let’s rethink economics together.

References:

Holt-Lunstad, J., Smith, T. B., & Layton, J. B. (2010). Social relationships and mortality risk: A meta-analytic review. PLOS Medicine, 7(7), e1000316. DOI: 10.1371/journal.pmed.1000316

Umberson, D., & Montez, J. K. (2010). Social relationships and health: A flashpoint for health policy. Journal of Health and Social Behavior, 51(Suppl), S54–S66. DOI: 10.1177/0022146510383501

Quote from Marshall regarding Universal Applicability of Economic Theories: Marshall made this clear at his inaugural lecture at Cambridge:

“Man himself is in a great measure a creature of circumstances and changes with them. The chief fault in English economists at the beginning of the century was not that they ignored history and statistics, but that they regarded man as so to speak a constant quantity, and gave themselves little trouble to study his variations. They therefore attributed to the forces of supply and demand a much more mechanical and regular action than they actually have. Their most vital fault was that they did not see how liable to change are the habits and institutions of industry…. While attributing high and transcendent universality to the central scheme of economic reasoning, I do not assign any universality to economic dogmas.”

Debt as a Political Tool: Hudson’s Experience

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In “House of Debt,” Amir Mian and Atif Sufi unveil the hidden yet pivotal role private debt plays in triggering macroeconomic crises. Surprisingly, most macroeconomics textbooks overlook this crucial relationship, leaving a gap in understanding. Michael Hudson, a renowned economist and historian, has a career defined by key experiences that offer profound insights into the political economy of debt. In a recent webinar, Hudson shared three transformative episodes from his life that reshaped his perspective on global finance. These moments reveal the intricate interplay between politics, economics, and international relations, showcasing how debt has been wielded as a tool of power and control. Hudson’s journey underscores an understanding of debt that transcends the conventional teachings found in economic literature, suggesting that there are indeed more complexities in the realm of finance than are dreamt of in academic discourse. These experiences are discussed by Hudson in the introduction to this webinar on: a 4000-year perspective on economy, money and debt. Link to transcript for the webinar.

Episode 1: The Chase Manhattan Experience

Hudson’s first major job on Wall Street was as the balance of payments economist for Chase Manhattan in 1964. His task was to assess the balance of payments of Argentina, Brazil, and Chile to determine how much they could afford to borrow. The prevailing idea among New York banks was that all economic surplus from these countries should be directed towards debt service.

However, Hudson’s analysis revealed that these countries were not generating enough surplus to repay their debts. His findings were unpopular within the bank, earning him the nickname “Doctor Doom.” The bank officers, whose bonuses depended on the volume of loans made, were not pleased with his pessimistic assessments. Hudson recounted a revealing meeting with the Federal Reserve, where it was evident that the U.S. government would lend money to friendly governments to keep them solvent, essentially supporting dictatorships and client oligarchies.

This experience exposed Hudson to the political nature of international finance, where loans were used not just for economic reasons but as a means to control countries politically. The idea was clear: countries that did not align with U.S. interests would face economic strangulation. This realization was Hudson’s introduction to the political dynamics of debt and the manipulation of economies for geopolitical purposes.

Episode 2: The Gold Standard and U.S. Military Spending

Hudson’s second defining moment came during his tenure at Chase Manhattan, where he developed a comprehensive balance of payments accounting format. His work revealed that the U.S. balance of payments deficit was entirely due to military spending, particularly for the Vietnam War and the maintenance of 800 military bases worldwide. This discovery was pivotal, as it contradicted the common belief that monetary theory was primarily about money being spent on goods and services.

Hudson’s predictions about the U.S. going off the gold standard due to its military expenditures proved accurate. He faced resistance and was eventually fired after pressure from Robert McNamara, then Secretary of Defense, who threatened to cut off government contracts to his employer, Arthur Andersen. This incident underscored the influence of military spending on economic policy and the lengths to which powerful interests would go to suppress inconvenient truths.

Hudson’s subsequent work at New York University and his publication of his findings solidified his reputation as a leading critic of U.S. economic policies. His book, “Super Imperialism,” detailed how the abandonment of the gold standard actually enhanced American economic dominance, contrary to the fears of his contemporaries. This period of his career highlighted the interconnectedness of military power, economic policy, and international finance.

Episode 3: Advising the Canadian Government and UNITAR

In the late 1970s and early 1980s, Hudson was appointed by the Canadian government to advise on how to navigate the new monetary order following the collapse of the gold standard. He advocated for Canada to create its own money rather than borrowing from foreign banks, arguing that this would be more economical and beneficial for the country’s development.

Hudson’s proposals were met with resistance from commercial banks, which profited from arranging foreign loans. This experience revealed the entrenched power of financial institutions and their influence over national policy. Despite the opposition, Hudson’s report, “Canada in the New Monetary Order,” was published, emphasizing the importance of national monetary sovereignty.

Hudson’s involvement with the United Nations Institute for Training and Research (UNITAR) further expanded his understanding of global debt issues. He predicted the Latin American debt crisis of the 1980s and advocated for debt cancellation, arguing that debts that could not be paid should be written off as bad loans. His foresight was confirmed when Mexico defaulted in 1982, leading to a widespread debt crisis in Latin America.

This episode reinforced Hudson’s belief in the need for a fundamental rethinking of international finance and the role of debt. It also illustrated the importance of historical perspective in understanding contemporary economic issues, a theme that would continue to shape his work.

Conclusion

Michael Hudson’s career has been marked by a deep engagement with the political economy of debt. His experiences at Chase Manhattan, his work on the gold standard and military spending, and his advisory roles in Canada and UNITAR have all contributed to his unique perspective. Hudson’s insights reveal the often-hidden political dimensions of international finance and the ways in which debt has been used as a tool of power and control. His work continues to challenge conventional economic thinking and advocate for a more equitable global financial system.

Nominal Versus Real Models

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

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

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

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

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

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

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

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

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

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

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

Links to Related Materials

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

Lessons from Monetary History: The Quality-Quantity Pendulum

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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