Growing up in British India, my father learnt that Great Powers had certain special characteristics. For global influence, they had to have sea power which required indented coastlines and natural harbours, coal mines for energy, extensive telegraph cables for communications. Furthermore, they had to have a cold climate to make them hardy, and be isolated from the mainland so as to have natural defences against potential rivals and enemies. In light of these criteria, it would be obvious even to a child, that the UK was the sole and unrivalled leader of the world.

The 1930s editions of Encyclopedia Britannica did not even have an entry for the word ‘democracy’. However, the emergence of the US as a world power changed everything. The First World War ruined European economies, leaving the US as the wealthiest. The winners redefined the criteria for development as being wealth alone. However, when certain oil-based economies with small populations overtook the US in GNP per capita, the criterion was revised to include an equitable income distribution. Later, when Switzerland and certain Scandinavian economies with good income distribution overtook the US, development theorists added the possession of infrastructure and natural resources. The gigantic US with its huge network of highways, dams, railroads, fertile agricultural land, etc. cannot be matched by the tiny European economies. But the point of this story is that the winners define the criteria for development, and ensure that the ongoing discourse acknowledges their leadership. To a much bigger extent than is commonly recognised, leadership and power are built upon structures of knowledge created by the powerful.

How world leaders define development is tremendously influential in setting the goals which everyone strives for. The British aristocrats preferred culture and philosophy, leaving technology to the working classes. Followers like Sir Syed established Aligarh University which emphasised arts; engineering was added only 50 years later. With the rise of the Americans, wealth, which was considered crass by the British, gradually became the sole criterion for development. All over the world, countries are pursuing GNP per capita as the single-most important goal. We need to change this definition of development, which has caused tremendous harm to society and environment.

One of the greatest surprises to economists has been the Easterlin paradox — huge amounts of increasing levels of wealth have not led to corresponding increases in happiness. A book by Professor Richard Lane documents the “Loss of Happiness in Market Democracies”. Studies of Happiness are re-discovering the ancient truths that money cannot buy love and friendship, and that social relationships are key components of happiness. Our development experience reinforces the need to change developmental paradigms. Mahbubul Haq implemented conventional growth policies in Pakistan and learnt that wealth does accumulate, but only in the hands of a select few. He then pioneered the Human Development Index as a superior alternative. Followers like Amartya Sen have pursued the concept to argue that we should concentrate on development of human capabilities. Taking this idea seriously would create radical changes in our approach to development.

Every human life is unique and infinitely precious. All babies are born with amazing potential, with capabilities to astonish the whole world. Our job as a society is to nurture these capabilities and provide an environment which allows them to come to fruition, instead of crushing them beneath the burden of economic deprivations. All our planning, resources and our institutional structures must be adapted towards the achievement of this goal. As a society, we must take collective responsibility to ensure that all children have the chance to achieve their potential. This is radically different from the current view of human beings as a resource to be used for the production of wealth. Education is designed to remove all irregularities and uniqueness, so as to allow the human cogs to fit together well, as interchangeable parts, to be plugged into the capitalist machine for the production of wealth. Shifting the target of our efforts to human development requires building social capital and empowering of communities. The greatest obstacle in our path is a top-down bureaucratic mindset which insists on centralised planning and control. We must learn to ‘trust people daringly’. Engaging citizens is a game-changer in the development process.

Published in The Express Tribune, May 18th,  2015.

In the ancient Rome, the Games were used to distract the attention of the masses from the sources of their misery. Much the same plan is in operation in modern times. My article entitled “The Shifting Battleground“, recently published in the Express Tribune, argues that the super-rich have successfully distracted the attention of the bottom 90% from the real battle being so successfully waged against the poor. See

During the last thirty years, most governments around the world have supported the long-run process of financial expansion that turned out to be characterized as the “financialization” of the capitalist economy. In this historical scenario, monopoly-finance capital became increasingly dependent on bubbles that, both in credit and capital markets, proved to be global sources of endogenous financial fragility. Financial and currency crises have also revealed that monetary and supervisory authorities do not cope with the complexity of the global, profit-seeking, innovative and speculative portfolios of investors and banks.

Central banks, in a context of financial liberalization, do not face financial disturbances easily. Indeed, credit squeeze, volatility in the valuation of assets, the menace of recession, the shift of investors toward liquid and safe assets, among other factors, put pressure on central banks and treasuries.

The idea of autonomous monetary management collapsed under the 2008 global financial crisis. As a matter of fact, the crisis showed that the central banks´ actions are not independent from private and public pressures. The social conflicts that emerged within the markets shifted to the political sphere and proved to challenge money as a public good – since livelihoods have been subordinated to the bailouts of the financial systems. Besides, the increasing growth of sovereign-debts has imposed the adoption of austerity programs which burden that mainly rely on workers and taxpayers.

Indeed, since the global financial crisis, monetary policy has been brought to the forefront. Considering this background, we welcome the recent Edward Elgar publication of The Encyclopedia of Central Banking, edited by Louis-Philippe Rochon (Associate Professor and Director, International Economic Policy Institute, Laurentian University, Sudbury, Canada and Co-editor, Review of Keynesian Economics) and Sergio Rossi (Full Professor of Economics, University of Fribourg, Switzerland). The entries of the Encyclopedia provide an update and a critical understanding of the complexity of monetary-policy interventions, their conceptual and institutional frameworks, and their own limits and drawbacks. Besides, controversial explanations of financial institutions, policy monetary tools and the crisis are presented from a historical perspective.
Indeed, this Encyclopedia certainly provides the pluralistic view we need to privilege in the contemporary studies of central banking.

See also:

My article on the limits of reason was published in Express Tribune recently (Monday April 13, 2015). This essay shows that logic is limited in its ability to arrive at a definite conclusion even in the heartland of mathematics. Pluralism is required to cater for the possibility that both Euclidean and non-Euclidean geometries represent valid ways of looking at the world. The world of human affairs is far more complex. In order to study and understand societies, one must learn to deal with a multiplicity of truths. This argument, which is related to the first, has been made in my article “Tolerance and Multiple Narratives” which was published in Express Tribune earlier (March 29, 2015). These ideas form part of the background for supporting the drive for pluralism in our approaches to economic problems.

The existing international financial architecture, left over institutions from the Bretton Woods period, proved useless to prevent or warn against the 2007-2008 crisis, or even less, solve it. Only when a new presidential grouping (G20) meeting was called for in London in March 2009, the issues of how to coordinate countercyclical policies and inject resources into the economies were discussed. At that time, a UN high level Commission was created to propose reforms to the international financial architecture. The results of what became known as the Stiglitz Commission came to light in April 2010; the Commission’s recommendations were, however, shunned by some large UN member countries due to their rejection of the principle of global solutions for global problems. Indeed, some European countries and the US still insist on national solutions, that is on the use of local regulatory agencies in the international financial field.

Eight years have elapsed since the crisis emerged in 2007. There are no negative impact on the real sector as well as the financial sector is still being felt by leading financial institutions or Central Bank’s authorities. The major financial problems are dealt with at a national level in spite of being a global problem. Since 2010, the SEC has levied large fines against TBTF banks’ wrongdoings according to the definition of LIBOR, the commodity markets, the exchange markets and the fraudulent sale of collateralized debt obligations with credit risk approval from the three large American credit rating agencies; European regulators have done some of the same. Simultaneously, vulture funds attacked Argentina and made evident a nonsense of having the last creditor obtaining a better payment terms than the first one, breaking the usual understanding of the pari passu principle while a New York judge held the country hostage to his decisions. Finally all the G7 economies have come to reflect over 100% public debt on GDP ratios with only one approach to resolving this problem: austerity affecting economic growth, the price levels, and employment. As a consequence, debt indexes have increased sharply, depressing economic activity and prices.

From this background emerges the need for a new international financial architecture.
The conference, that is being organized by Oscar Ugarteche and Alicia Puyana,  focuses on the current global financial scenario and what appears as the new international financial architecture, which poses many questions that need to be addressed:

  • How did the crisis affect the structure of the financial sector in the different regions of the world? What kinds of provisions where implemented to manage the impact?
  • Has the financial crisis influenced the financial flows for productive sectors in the regions?
  • Have the regional financial architectures been adequately reformed after the crisis? Do they have any margin of autonomy to reform, or are they totally dependent on foreign banks and external funds?
  • Can vulture funds be considered as an element of the so-called new financial structure to prevent crises, or are they one more cause of instability?
  • Are the IMF and the available existing international reserves sufficient to prevent another major crisis?
  • Can the IMF be reformed, despite European and US reluctance to do so?
  • How should debt reduction mechanisms function in this new global scenario?
  • Are there lessons from the Latin American debt crisis of the 1980’s for Europe? Or is it a new type of crisis?
  • Are the austerity programs recently imposed on indebted countries an appropriate policy measures to prevent financial crisis, such as the one in 2008?

Papers falling within the broad topic of the conference as well as on related aspects that are not explicitly noted here are welcomed.

As the Chair of the Wea Conferences, I invite you all to submit papers and participate in the Discussion Forum.

For deadlines, guidelines and submission:

This was published in Express Tribune Opinion Pages on March 16th, 2015 —Keynes vs IMF. It is placed in the Pakistani context, but the same issues are relevant for Greece, Spain and Ireland.

Leading economists like Keynes and Fisher had forecast prolonged prosperity, just prior to the Great Depression of 1929. The shock of the Great Depression led Keynes to create Keynesian Economics. According to conventional economic theory, increasing the quantity of money in circulation has only one effect: increasing the level of prices. That is, printing money is inflationary, and has no effects on the real economy. Many economists of the time noted that massive bank failures had led to substantial reduction in the money supply. They came to a realization that these events were related. Contrary the classical theory that money only effects prices, the shortfall in the money supply caused the massive unemployment of labor and other factors of production and the contraction of the GNP.

Keynesian theory is based on a very simple idea that conduct of the ordinary business of an economy requires a certain amount of money. If the amount of money is less than this amount, then businesses cannot function – they cannot buy inputs, pay laborers or rent shops. This was the fundamental cause of the Great Depression. The solution was simple: increase the supply of money. Keynes suggested that we could print up money and bury it in coal mines and have unemployed workers dig it up. If money was available in sufficient quantities, businesses would revive, and the unemployed laborers would find work. By now, there is nearly universal consensus on this idea. Even Milton Friedman, the leader of Monetarist School of Economics and arch-enemy of Keynesian ideas, agreed that reduction in money supply was the cause of the Great Depression. Instead of burying it in mines, he suggested that money could be dropped from helicopters to solve the problem of unemployment.

But what about inflation? Isn’t it true that printing money in massive quantities would lead to inflation? According to Keynesian theories, this would happen after full employment was achieved. That is, once the economy reached its maximum production capabilities, further money could not contribute to an increase in production. At this point, printing more money would only lead to inflation, exactly as the classic economic theory predicts. Keynesian theory gives the Central Banks of the worlds an extremely important task: maintaining the money supply at exactly the right level to create maximum production without running the risk of inflation. Keynes also said that monetary policy may be insufficient for the task, and the government had direct responsibility to ensure full employment using fiscal policies.

Regulation of financial markets, social support for the poor, and government responsibility to provide jobs for all led to decades of prosperity in Western economies. The share in the wealth of the bottom 90% increased, while the share of the top 0.1% decreased. This state of affairs did not please the wealthy elites, who launched an extremely successful attack against Keynesian ideas in the 1970s. The Arab oil embargo led a sharp rise in oil prices and inflation, while simultaneously disruptingdisrupting productive activities and creating unemployment. Keynesian theories state that we can only have one or the other; “stagflation” or simultaneous presence of high inflation and high unemployment is ruled out.

This weakness in Keynesian theory was successfully exploited by the rich and powerful to argue that the main problem lay with government interventions. Reagan dismantled some of the post-Depression regulations which limited the powers of the wealthy financiers, as well as the social support and unions which strengthened the labor class against them. In particular, with great fanfare, Reagan de-regulated the Savings and Loan (S&L) Industry. Exactly as in the Great Depression, the banks took advantage of this to speculate in risky investment with the depositors’ money, and lost billions of dollars, creating a nation-wide banking crisis. However, the government had learnt its lessons from the Great Depression, and did a massive bailout to prevent a financial crisis entailed by the collapse of the S&LsL. Over the next few decades, deregulation unleashed the power of the financiers, and cuts in social services weakened the labor class, with predictable results. Speculative financiers gambled heavily with the money of others deposited in banks, leading to myriad monetary crises. At the same time the labor class was squeezed, resulting in rising inequalities and massive concentration of wealth at the top.

In the post-Keynesian era, the clarity of Keynes has been lost. Many Central Banks have gone back to pre-Keynesian ideas, abandoning the goal of full-employment, and focusing solely on controlling inflation. Substantial doubt has been created as to whether or not monetary policy, or helicopter money, can be useful in solving problems of unemployment. When countries spend more foreign exchange on imports than they can earn, they are forced to borrow dollars from the IMF. As a condition of such loans, the IMF insists on austerity – governments should balance budgets and not print money to finance deficits. According to the IMF, financing deficits with increases in money supply can lead to high inflation, with heavy economic costs. However, according to Keynes, we should increase money supply in an economy with high unemployment such as Pakistan. Printing money is not inflationary in such a situation. So who is right? Keynes or the IMF?

Recent research by Princeton economists Mian and Sufi sheds considerable light on the answer, which is obvious in retrospect: Both Keynes and IMF are right. What happens depends on who picks up the helicopter money and what they do with it. If those who get the money buy land, property values will go up. If they invest in stocks, this will create a bubble in the stock market. If they put it in their Swiss accounts, this will lead to depreciation of the exchange rate. However, if the money is used wisely, to invest in projects which increase the productive capacity of the economy, this will create employment and generate the economic returns needed to provide support and backing for the newly created money.

When Keynesian policies of full employment and social support for laborers eroded the wealth shares of the power of the rich, it is an article of faith for the wealthy elite, the counterattack created alternative policies, as well as theories and ideologies to support these policies. Decades of experience with these policies, codified in the Washington Consensus as privatization, liberalization and stabilization, has shown that they produce increasing inequality but do not produce growth. Alternative models for successful development are always corrupt. The historical record does not bear this out.available. The most spectacular recent example was labor leader Lula of Brazil. After being elected president in 2003, his deficit financed programs of social support and investment created progress and prosperity. Under Lula, Brazil went from being the most heavily indebted country in the world to the eighth largest economy, and 20 million people rose out of poverty. There are many other examples of wise public spending listed by Ellen Brown in The Public Bank Solution: From Austerity to Prosperity. Other kinds of examples also exist, where reckless and corrupt governments can wreak havoc on the economy, as the IMF fears. Can we rise to the challenge which faces us in Pakistan? That is, to curb corruption and spend efficiently on social services and productive investments, leading to the Keynesiian outdcomes of full employument wiithoujt inflation?

Modern history is largely driven by the battle of the rich (top 0.01%) against the masses (bottom 90%). Over the past few decades, the rich have been tremendously successful in having it all their way. A previous blog post on “Deception and Democracy” illustrates by examples their successful conversion of democracy into plutocracy in the USA. As pointed out by Polanyi, unregulated markets create disastrous outcomes for the majority. Therefore, in a democratic environment, theories which misrepresent facts and justify massive inequalities are essential pillars of support for the plutocrats. Spreading these theories via media and educational channels helps create an environment where people support policies which go against their common interests.

As many posts on austerity on the RWER blog have shown, austerity has only caused massive damages to the European Union (just search for “austerity” on the blog). Theories which support austerity as a policy are disseminated by premier educational institutions and provide a crucial pillar of support for enforcing such policies. Equally, educating the public about the flaws of such policies and providing a viable alternative is an essential element of a counter-attack. Ellen Brown has performed a tremendous service with her books “From Austerity to Prosperity: The Public Bank Solution” and also “Web of Debt: The Shocking Truth about our Monetary System and how we can break free.”  I have tried to pick up certain key insights from these books and summarized them as a solution to development problems in Islamic economies in my paper: “On the Nature of Modern Money.” However this paper is lengthy and complex, and meant for a professional audience. My newspaper article “Keynes vs. IMF” presents a brief and oversimplified version of some of the key ideas the public needs to learn, in order to be able to overcome the illusion that austerity is good for them.

An important point here is that the real world economists need to take their case to the public, which is victimized by the neoclassical economists. Talking among ourselves is not helpful except in terms of discovering the strongest arguments and best lines of attack. There is absolutely no point in trying to get published in leading journals, or trying to change minds of professional economists – they have the most to lose. Our natural audience are those who have the most to gain by listening to our message. This means that we need to make much greater efforts to convey our message to the general public. This involves participating more on popular forums like conventional blogs, writing book reviews for good books, providing critiques and alternatives for bad ones, writing for newspapers etc. It also involves making the efforts required to translate and present our theories and models in ways attractive and comprehensible to a general audience.


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