Methodology of Modern Economics

My paper is a survey of the huge amount of solid empirical evidence against the utility maximization hypothesis that is at the core of all microeconomics currently being taught today in Economics textbooks at universities all over the world. It is obviously important, because if what it says is true, the entire field of microeconomics needs to be re-constructed from scratch. Nonetheless, it was summarily rejected by a large number of top journals, before being eventually published by Jack Reardon as: ” The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature,”  in International Journal of Pluralism and Economics Education, Vol. 3, No. 4, 2012, pp. 366-414.   Speaking metaphorically, my paper documents the solid evidence that the earth is a round sphere in world where educational institutions teach the widely held belief that the earth is flat. Readers of RWER blog will recall that when challenged on the failure of macroeconomics after the Global Financial Crisis, economists retreated to the position that while macro theory may be in a bad shape, at least Microeconomics is solidly grounded. My paper blows this claim out of the water. As a result, nothing is left of Micro and Micro, and of economics as whole. This supports my earlier claim that a Radical Paradigm Shift is required to make progress — patching up existing theories cannot work.

None of the several leading journals that I sent the paper to made any comments about any mistakes in my arguments. There were two main reasons which were stated for rejections. One was that the paper was “not appropriate” for the journal. This seems ridiculous; how can a paper which challenges the foundations of the subject be “inappropriate” (however, an explanation will be provided later). Two was that the results of the paper were well-known. I also sent the paper for comments to many leading economists. Kenneth Arrow, who was once a teacher of mine at Stanford, responded as follows “Thank you for the very complete and well-argued critique of the utility-maximization theory. Of course, the remaining question is, what should take the place of that theory?”.  This is just to document that the paper itself provides solid and irrefutable evidence against modern microeconomic theory. Given that the vast majority of economists continue to teach microeconomics based on utility maximization, and that this theory is widely believed by students of economics throughout the world, it would seem of great importance to document the empirical evidence against it and use it as a springboard for developing alternative theories, more consistent with empirical observations of human behavior. However, none of the mainstream journals displayed any interest in publishing this paper.

This leads to a puzzle, which requires some thought. As famous theoretical physicist Richard Feynman put it: “It doesn’t matter how beautiful your theory is, it doesn’t matter how smart you are. If it doesn’t agree with the experiment, it’s wrong.”  The experimental result — corresponding to the empirical evidence — is all important in physics, which is why there has been tremendous progress in physics. On the other hand, the economists display no interest in empirical evidence at all. This indifference of economists to empirical evidence which contradicts their theories has been noted by many; see previous post on “Quotes Critical of Economics” for the full quote briefly cited here:

Advertisements

Quotes Critical of Economics

This is an assorted collection of quotes I have found useful from time to time in different contexts. I am putting them all together for my own reference, as well as for the benefit of others who may find them similarly useful to make points.

JM Keynes Quotes (mostly from General Theory GT):

The composition of this book has been for the author a long struggle of escape, and so must the reading of it be for most readers if the author’s assault upon them is to be successful,— a struggle of escape from habitual modes of thought and expression. The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds. (GT)

It is an extraordinary example of how, starting with a mistake, a remorseless logician can end up in bedlam. (GT)

It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics (along with the other moral sciences), where it is often impossible to bring one’s ideas to a conclusive test either formal or experimental. (GT)

For if orthodox economics is at fault, the error is to be found not in the superstructure, which has been erected with great care for logical consistency, but in a lack of clearness and of generality in the premisses – (GT)

For professional economists, after Malthus, were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation;— a discrepancy which the ordinary man has not failed to observe, with the result of his growing unwillingness to accord to economists that measure of respect which he gives to other groups of scientists whose theoretical results are confirmed by observation when they are applied to the facts. (GT)

The classical theorists resemble Euclidean geometers in a non-Euclidean world who, discovering that in experience straight lines apparently parallel often meet, rebuke the lines for not keeping straight as the only remedy for the unfortunate collisions which are occurring. Yet, in truth, there is no remedy except to throw over the axiom of parallels and to work out a non-Euclidean geometry. Something similar is required today in economics. (GT)

The Invisible Hand

This post is a continuation of ET1%: Blindfolds Created by Economic Theory, We show how the Invisible Hand theory appears to be neutral but actually favors the top 1%.

As quoted and refuted in my earlier post on “Failures of the Invisible Hand“, Mankiw writes that: “The reason for excellent functioning of decentralized market economies is that all participants are motivated by self-interest. This self-interest works better than love and kindness in terms of promoting social welfare.”  

What a monstrous statement! How can any human being think such thoughts? This is what comes from cutting off human experience as a source of knowledge, removing hearts from bodies, and leaving only brains floating in vats as a the sole source of knowledge.

Our hearts — in their pure states –would revolt at the oxymoron of a society based on selfishness. However, contamination by the poisons of economic theory and positivism leads to the blindness to sources of human welfare displayed in the Mankiw quote. In earlier times, A Christmas Carol of Dickens was sufficient as a reminder the wealth is not a measure of welfare. However, modern times reflect modern mindsets, which convert greed and wealth to desirable virtues, as reflected in the Disney version of Uncle Scrooge. So, sadly, it becomes necessary to argue on logical grounds, appealing to brains in vats, instead of appealing to the heart.

First, let us note that “excellent functioning” just means maximization of wealth, and “social welfare” is also measured by the amount of wealth owned by society. At the individual level, the end-of-life psychiatric disorders of Howard Hughes have been the subject of numerous books and articles. Would anyone consider that the billions he made pursuing profits in a market economy created greater social welfare for him than love and kindness would have? What is true at an individual level is also true at a social level — The Easterlin Paradox shows that massive gains in wealth in societies have not caused corresponding increases in happiness. This is true both in time series for single countries, and for cross sectional studies across countries. As detailed and careful studies show — there is no long run relationship between happiness and increases in GNP per capita. Because this finding threatens the foundations of economic theory, economists have challenged it on many different grounds. In a review of these critiques which re-affirms their original findings, Easterlin et. al. have shown that, they do not differentiate between short and long run. The Easterlin Paradox is more accurately stated as – money does buy happiness in the short run, but not in the long run. This is exactly in accordance with my post on “The Coca-Cola Theory of Happiness” — Coca-Cola does buy happiness in the short run, but is not the formula for long run happiness.

Evolutionary biology has now discredited that idea that the survival of the fittest requires selfishness and competition; see Cooperation and Generosity leads to Evolutionary Success. It is almost obvious that groups would be strengthened by coooperation and generosity. There is no question that we would all prefer to live in a society based on love and kindness, instead of living in jungle ruled by survival of the fittest.  If “social welfare” is understand properly, instead of being reduced to a quantity of money in the bank, it is clear that love and kindness would work much better at promoting social welfare.

Why then have economists in the twentieth century insisted on attributing a mis-interpretation of the invisible hand to Adam Smith (see “Adam Smith & the Invisible Hand“) and have made this the central pillar of modern economic theory? The answer lies in ET1%: the necessity for the top 1%  in democratic societies, to invent theories which appeal to the bottom 90%, while actually favoring the rich and powerful. The Invisible Hand asks us to let everyone do whatever they want, since it will all work out to the best for the entire society. Even if the rich and wealthy appear to be exploiting others, the invisible hand will make sure that their greed is harnessed for the welfare of the society. The only way to make sense of this nonsensical message is to understand it as a clever piece of propaganda which supports the interests of the rich and the powerful, by identifying these interests with those of the society as a whole. This is very similar to the “trickle-down” theory, according to which enriching the wealthy will (eventually) bring benefit to the entire society. Even though it is easy to demonstrate “The Failures of the Invisible Hand” both empirically and theoretically, this theory dominates the pages of the modern economics textbooks. This demonstrates the main theme of my post on ET1%: Blindfolds created by Economic Theory;  modern economic theory is meant to blindfold students to the tremendous advantages the capitalist system confers on the tiny minority of the rich and wealthy, the 1%. It systematically distorts our vision and mindset to cause the tremendous inequities of the system disappear. See my paper on “The Invisible Hand: Death of a Metaphor“, for further explanation for how, with repeated use, a metaphorical usage becomes conflated with reality in the public mind. This is extremely beneficial for the 1% as it allows them to create myths which protect their interests, and have them accepted as truths in the form of modern economics. This illustrates the Power/Knowledge thesis of Foucault.

Radical Paradigm Shifts

The methodology and ideology of modern economics are built into the frameworks of educational methods, and absorbed by students without any explicit discussion. In particular, the logical positivist philosophy is a deadly poison which I ingested during my Ph.D. training at the Economics Dept in Stanford in the late 1970s. It took me years and years to undo these effects. Positivism uses clever arguments to make you deny what you feel in your bones to be true, and make you believe what your heart says must be false — for example our supposed knowledge of subjective probabilities of unknown events. The roots of the problem go back to the famous Cartesian argument that “I think therefore I am”. Although it is clever piece of logic, it has a deadly effect. I know that I am alive because I can feel the blood flowing in my veins, the tingling of my skin, and a thousand other bodily sensations. “I feel therefore I am”. Denying this experience as a valid source of knowledge reduces me to a brain floating in a vat, which is exactly what logical positivism entails. In fact, despite Descartes, it is impossible to REASON our way to certainty. We can only create an illusion of certainty. Descartes’ argument is deeply flawed, and illustrates the weakness of human reason. When we formulate the concept of “I”, isn’t existence automatically part of this? Did I not exist when I was a baby, and was unable to formulate these thoughts? Do I blink out of existence when I go to sleep? This and many other difficulties make this argument incoherent. Modern economics is much like this. It starts by making assumptions which are dramatically in conflict with everything we know about human behavior (and firm behavior) and applies mathematical reasoning to situations where it cannot be applied, quantifying the unquantifiable and coming to completely absurd and ridiculous conclusions. NONETHELESS, speaking from personal experience, the brainwashing is powerful and effective. It is a slow and painful process to undo. I have often thought about launching a “Positivists Anonymous” club, to help others attempting the same transition, of unlearning positivism. For those who want a little help, I recommend my article on Logical Positivism and Islamic Economics. This provides a detailed analysis of the flaws of positivism, and also why, despite these flaws, it came to be widely accepted.

The Secrets of Happiness

Introduction — I wrote this essay a while ago, and I am adding this preface here to explain more about WHY I wrote it:

Preface:

A central problem of our age is the turning of “means” into “ends”.  It is obvious that money, by itself, is not a source of pleasure –  it is a means to this end. Similarly, freedom is useful only if it is freedom to allow us to do something we want to do. Nobody would want the freedom to sell himself into slavery — which is effectively the only free choice offered to the poor in capitalism. Yet, today, due to a long, strange, and complex, historical process, freedom and wealth have become the goals of life, and the religion of most people on the planet. By religion, I mean that morality is based on these two goals — anything which creates wealth is desirable and hence moral, while anything which allows us greater freedom to act on our desires is also moral (this is the foundational principle of utilitarianism). In order to clear our minds of traps created by false paradigms, it is very useful to contemplate the opposites, as a mental exercise. As the dialectical method suggests, let us focus on the possibility that wealth and freedom are harmful to us. Wealth tempts us into the misconception that we can buy happiness with it, and this cheap path to short-term happiness — “The Coca Cola Theory of Happiness” — prevents us from learning and understanding the sources of long-term happiness, destroying the possibility of genuine happiness. Similarly, freedom tempts us into following paths of behavior which lead to short term pleasures at the cost of our long term happiness — we pursue strategies of instant gratification, failing to understand the need for sacrifice, struggle, and voluntary acceptance of suffering, in order to achieve higher goals. Not having wealth would be useful to enable us to learn to search for happiness in more productive directions. Instead of freedom, discipleship and slavery to an established tradition which teaches devotees to act in ways that lead to self developments and enlightenment, may create long run capabilities which are beyond the reach of our current imagination and vision.

Modern economic theory is based on the absurd and ridiculous Coca-Cola theory of Happiness, and assumes that the purpose of all human beings is to maximize the pleasure they obtain from a lifetime of consumption — It is flabbergasting that economists are proud of this childish microeconomic theory as a great accomplishment! If we had a more mature understanding of sources of human happiness, we would be in a better position to develop an economic system which could succeed in providing welfare for all.

The Secrets of Happiness: (published in The Express Tribune, June 27th, 2016.)

Psychologists have studied abnormal behavior for a long time, but have only recently started to pay attention to happiness. In this article, we map the findings of this happiness research to traditional concepts, which have been abandoned by modern mindsets. Despite our strong convictions to the contrary, happiness does not depend on our external circumstances. The greatest myth about happiness is to search for it in the outside world. People think that the perfect mate, the perfect job, achieving this that or the other goal will bring happiness. When they achieve their desired external goals, they are inevitably disappointed. However, instead of re-thinking their strategy, they shift the goal-post, continuing to seek more and more in a desperate quest for the elusive happiness. But happiness does not lie outside us, and it does not lie in distant goals. It lies within our grasp, in the present moment. At the present moment, we need to be able to analyze and change our internal mindset. “Know Thyself,” or self-awareness, is one of the crucial keys to happiness.

Reflection can make us aware of our conscious thought stream, but it is more difficult to become aware of our subconscious thought stream. Among the many effective techniques for tapping into the subconscious, free writing involves taking ten to fifteen minutes to write down whatever thoughts come to mind, without paying attention to grammar, spelling, style or any formalities. This method works to bring out into the open our thoughts which create obstacles to happiness. Extremely damaging to happiness is rumination on hurts, losses, tragedies, missed opportunities and the like. With conscious effort, we can put away negative thoughts. The concept of “predestination” is a powerful tool to avoid rumination over what might have been. The Quran states that all misfortunes have been recorded in advance, “in order that ye may not despair over matters that pass you by, …” Resignation to an inevitable fate brings peace of mind, while despair and distress is caused by ruminating over what might have been, or what might be.

In addition to suppressing negative thoughts, we must cultivate and nurture positive thoughts. One important source of positive thoughts is to cultivate gratitude for the gifts we have been given by God, instead of regretting what we do not have. This, and many deep lessons about life, were traditional elements of an Islamic childhood training. Sheikh Saadi writes about a boy going to Eid Festival Prayers with old shoes, and regretting not having new ones like the other children. Then he sees a boy with amputated feet, and feels gratitude that he has the feet on which to put shoes. The gifts of God which surround us are so extensive that reflecting on what we have, and reflecting on the millions who do not enjoy our privileges, is sure to lead to gratitude. Furthermore, as a wonderful bonus, God has promised to increase our gifts if we are grateful for what we already possess.

Positivity is also generated by optimism, which is created by cultivating trust in God. We trust in His Wisdom that the short run trials and tragedies we face are in our best long run interests. Those who cultivate “tawakkul” remain serene in circumstances which cause nervous breakdowns for others. Furthermore, the Quran promises those who trust in God to lead them out of difficulties via pathways they cannot anticipate. We need to consciously practice and make efforts to learn to re-shape our thoughts and words into positive frameworks of half-full glasses, instead of the negative frameworks of half-empty ones.

All of the creation belongs to the family of God. If we seek to serve others, for the love of God, we will be duly rewarded. The highest standards are set by the Quran, which recommends giving away that which you love most. However, Islam is a pragmatic religion and our Prophet Mohammad SAW set out three levels of acceptable behavior. The highest level is to do good in response to harm done to you. The second level is to forgive the one who has done you harm. The third level, which is also permissible, is to take revenge, but only to the extent of the harm done. It is NOT permissible to do more harm than that which was done to you. Even without following the highest standards of conduct, it is amazingly easy to make others happy — even a kind word, which costs nothing, can do wonders. Selfish striving for happiness kills the possibilities of happiness, because what human beings value most is being loved and appreciated by others. We must give in order to get, to create a society with warmth and love, which is a core component of happiness. This then is the paradox of happiness: it comes to those who do not seek it for themselves but seek to make others happy, while it eludes those who pursue it vigorously without concern for others.

 A related article is “Can Money Buy Happiness?“, which discusses the Easterlin Paradox. See also, articles on society & happiness.  This article, with introductory comments on the dominant religion of hedonism, is also posted on my Islamic WorldView Blog

Finding a Progressive Methodology

Ever since the Global Financial Crisis, there have been an increasing number of voices calling for change in the economics curriculum/syllabus. However, even people who are sharply critical of mainstream (Rodrik, Stiglitz, Krugman) merely suggest minor and peripheral changes, and do not question the fundamental methodological basis on which neoclassical economics rests. In fact, a radical paradigm shift is required. According to current nominalist methodology, any model which produces a match to observables is a good model. The economists have lowered the bar further by not even requiring a good match, and not even comparing model results to reality. See “Friedman’s Methodology: A Stake through the Heart of Reason.” When the methodology is seriously deficient, people are allowed officially to make crazy assumptions, as long as the model produces a match with reality. For example, Paul Romer says in the Trouble with Macro: (macro) models attribute fluctuations to imaginary forces (like phlogiston), instead of agent behavior.  This methodology is such that a good model can only emerge by a random accident — just as the theory of evolution holds that life emerged by accident. I have explained how this seriously mistaken methodology came to be adopted, as a result of the wrong side winning the battle of methodologies; see “Method or Madness?”

Keynesian models remain substantially superior to modern RBC and DSGE models because they can explain voluntary unemployment, which is ruled out by assumption in the latter models. They can also explain how money, banking, and debt have significant impacts on the real economy, unlike modern macro models. Nonetheless, Keynesian models were rejected in favor of dramatically inferior models — — see postscript on linked post for “70 years of Economists’ Failure to Understand the Labor Market“. When the methodology is so bad that it cannot differentiate between good and bad models, and cannot revise models in face of conflicting observations, then it become useless to debate whether any particular model is good or bad. After all, even though Solow thought that DSGE models were developed for Mars (see Solow testimony), and Lucas and Sargent were akin to madmen who believed themselves to be Napolean Bonaparte — DSGE models continue to be used throughout the world, and Lucas and Sargent are extremely respected names in the profession. This is true despite  the fact noted by Olivier Blanchard that their models make “assumptions profoundly at odds with what we know about consumers and firms.”

Building good models within the current methodology will serve no purpose; one must change the methodology to one which is CAPABLE of distinguishing between good and bad models, and which is CAPABLE of correcting and revising models when they do not match observational evidence. Such a methodology, which is radically different from what is currently in use, is available in Polanyi’s Methodology  It rejects methodological individualism in favor of giving agency to collective action — groups, communities. It rejects the isolation of economics, arguing that all dimensions of human societies — social, political, economic — interact and cannot be understood in isolation. It also asserts, contrary to mainstream views, the economic theories cannot be understood outside of their historical context, and also, history cannot be understood without considering the economic theories formulated to understand this history — since policies were based on these theories and shaped the course of history. To take this “entanglement” into account, we must study the co-evolution of theories and history. I have several posts explaining entanglement; for instance — The Entanglement of the Objective and the Subjective, Hunter-Gatherer Societies, and The Three Methodologies.

The main point I am trying to make here is that our problems with current macro and micro models cannot be resolved at the level that we are seeking solutions — that is, criticizing models as being bad, contradicted by data, meaningless, nonesensical, or absurd. Providing better models is useless, when there is no methodology (other than Solow’s smell test, infinitely subjective) to determine whether a newly proposed model is better than the previous one.  Solutions can only be found at the META-Level, where we consider theories about how theories come to be accepted. This point is made in the article ” On the Central Importance of a Meta-Theory for Economics“. The main methodological question we need to focus on is: How do we distinguish between good and bad theories? Given theory A and theory B, how do we decide which one should be used? Economists methodology is based on rules which make impossible the emergence of good theories. As Mankiw states in the intro to one of his texts (and Krugman repeats) good economic models are based on optimization and equilibrium. Overwhelming empirical evidence shows that human behavior is driven by heuristics. Studies of dynamic systems show that essential aspects of these systems are determined by what happens out of equilibrium; it is impossible to say what will happen by just calculating the equilibria of the system. So once one is committed to Optimization and Equilibrium, one has put on a blindfold that makes it impossible to see reality.  The methodological principle that a theory is good if and only if it is based on maximization/equilibria is what leads to construction of theories which are profoundly at odds with observed facts. Furthermore theories which are aligned with facts — like Keynesian involuntary unemployment — are rejected, only because economists cannot create models which align Keynes with optimization and equilibrium (though this is just due to inability of economists to understand complexity, due to which they default to single-agent models). Even though Keynes CAN be aligned with optimization/equilibrium — this has been the AGENDA of the New Keynesians, to show that standard methodology need not reject Keynesian theory — this is the WRONG agenda. The right agenda requires thinking seriously about methodology — HOW can we find a methodology which allows us to discriminate between good and models, and allows us to make PROGRESS over time, as we gradually learn to build better models, overcoming defects of previous poorer models? If we had such a methodology, we would not face a situation which, according to Romer, there has been three decades of intellectual regress, where models have become worse, and hard won knowledge has been lost.

Islamic Economics: Transforming Humans

Whereas conventional economics takes the nature of man as fixed and exogenous, Islamic teachings consider humans to simultaneously possess the potential for being better than angels and also for being worse than animals. Given this dual nature of man, the focus of Islamic teachings is to invite towards the good, and to discourage and prevent the evil. The focus is to try to transform human beings so that they become kind, compassionate, cooperative and generous, instead of acting on their base instincts of greed and competition. For more details in this connection, see Spirituality and Development.

The following ABSTRACT of proposed paper submitted for consideration for the 12th ICIEF at Ummul-Qura University, 10-11 Feb 2019, Mecca, Saudi Arabia outlines a methodology for working on transformation of human beings towards the good.

ABSTRACT:

All social sciences consist of three distinct dimensions. The first is a positive description of human realities. The second is a normative description of an ideal state of affairs. The third is a prescription of what needs to be done to transform the current state to the ideal state. Conventional economics describes humans as being homo economicus, motivated solely by the desire to maximize pleasures obtained by consumption (of goods and services). The ideal state of affairs is for all people to be able to satisfy all desires, but this is not possible due to scarcity. The transformative strategy is economic growth – we increase the amount of production in order to be able to remove scarcity and achieve plenitude. The pursuit of economic growth at all costs, prescribed by conventional economic theory, has caused massive economic injustice, and put the future of mankind in peril, by destroying planetary resources and human communities in the mad rush for growth.

Islam differs from conventional economics in all three dimensions. The description of human beings is substantially more complex, and closer to realities of human behavior. Humans have a wide variety of different goals, and they have conflicting desires and motivations. The human heart is a battleground between the forces of good and evil. The human being has been give the capabilities for excellence in both directions, for the greatest good as well as the greatest evil. The ideal state to strive for has been described theoretically in the Quran and Hadeeth, and the perfect model for behavior has been sent to us in the form of our Prophet Mohammad SAW. The strategy for transformation of human beings is Tazkiya, or purification of the heart from idle desires.
Conventional economic theory takes the nature and desires of man as exogenously given, and works on producing goods to satisfy all desires. Islam works on changing the hearts of men to purify them of the greed and competition for worldly goods, and replace these by the higher norms of cooperation and generosity. True richness is the contentment of the heart, which comes from abundance thinking, rather than worrying about scarcity. The Prophet Mohammad SAW created a revolution in history, transforming ignorant and backwards Arabs to become leaders of the world, and to launch a civilization which enlightened the world for a thousand years. Today, the central strategy of an Islamic approach to economics must similarly be to work on the hearts of men, instead of on the production of wealth.

OUTLINE of Proposed Paper:

Conventional Economics is wrong in all three dimensions.

As a DESCRIPTION of human behavior, homo economicus fails miserably.  As behavioral economists have discovered, actual human behavior is dramatically different from the predictions made by economists — see “Behavioral Versus Neoclassical Economics” or “Homo Economicus: Cold, Calculating, and Callous” for the contrast between reality and economic theory.

As a normative theory, the idea that everyone should seek to maximize the pleasure obtained from a lifetime of consumption is dramatically flawed. Seeking material comforts only brings short-term pleasure, but does not lead to long term happiness. See my earlier post on The Coca-Cola Theory of Happiness — even though a drink of coca cola may bring a lot of pleasure to a hot and thirsty man, keeping the referigator stocked with cold drinks will not bring him a lifetime of happiness. Deeper study shows that long term welfare and happiness is strongly dependent on cultivation of gratitude, compassion, and other characteristics and qualities encouraged by Islamic teachings.

As a transformative theory, the idea that growth will remove scarcity is exceedingly foolish. As we fulfill desires, they increase. Furthermore, people seek to have higher standards than their neighbors, in order to feel happy. This creates a rat race where everybody spends huge amounts of time and effort trying to achieve higher standards of living, but nobody feels happier as a result — the Easterlin Paradox: Can Money Buy Happiness?.  Islam teaches us if we give someone a valley full of gold, he will desire another one. Nothing will fill the belly of man except the dust of the grave. Islam offers the solution that we should NOT fulfill our idle desires, and control our Nafs. Instead, we should learn contentment of the heart, which is the true wealth.

Islamic Economics Offers a Superior Alternative in All Three Dimensions

As a descriptive theory, Islam provides us with a rich description of the complexities of human behavior. The human heart is a battleground between good and evil, and the human being has the capacity to be higher than the angles and also the capacity to be worse than the beasts. This matches with experimental evidence and also with our personal observations — human beings display cooperation and generosity, along with the selfishness and greed assumed by economics. Islam provides a far more accurate match to the observations of behavioral and experimental economics, giving us a better descriptive theory.

As a normative theory, Islam is far superior to conventional economics. Economics suggest that the sole purpose of life is maximization of pleasure obtained from the utiltiy of consumption. Islam teaches us that this pursuit of material goods and worldly pleasure is attractive to the hearts of men, but this is an illusion. Real satisfaction comes from higher pursuits, and cultivation of character traits like gratitude towards Allah for His countless gifts and blessings. The path to everlasting pleasure, both in this world and the next involves learning Tawakkul or Trust in God, cultivating Contentment, and learning Taqwa.

As a transformative theory, Islamics demonstrated their power by catapulting the backwards and ignorant Arabs to world leadership positions, and by launching a civilization that educated the world for a thousand years. These teachings still retain their power to change our hearts and to change the world — see Our Prophet SAW as a Guide for Revolutionary Change or Modern Miracles of Mohammad SAW. Unfortunately, as prophesied, Islam has become a stranger to the Muslims. Today the Muslims no longer believe in the power of Islam to create a revolution — instead, they think that we must rely on Western teachings in order to make progress. For a more detailed explanation, see The Modern Mu’tazila

To conclude — in all three dimensions, modern economics is seriously wrong, while in all three dimensions, Islamic economics provides a dramatically superior alternative. Sad to say, Muslims have been so impressed with the West that they have accepted Western economic theory as superior. Whenever they saw a conflict between Western economics and the Quran, they re-interpreted the Quran instead of rejecting the Western theories. As a result, they have been trying to create an Islamic economic based on Western foundational principles of scarcity, greed, and competition — see “The Crisis in Islamic Economics“. What we need to do instead is to build directly on Islamic foundations based on the abundance of the provision by Allah leading to generosity and cooperation. For further explanations, see The Spiritual Obstacle to Genuine Islamic Economics, and Questioning All of Economic Theory?