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The bull charges the red flag being waved by the matador, and is killed because he makes a mistake in recognizing the enemy.  A standard strategy of the ultra-rich throughout the ages has been to convince the masses that their real enemy lies elsewhere. Most recently, Samuel Huntington created a red flag when he painted the civilization of Islam as the new enemy, as no nation was formidable enough to be useful as an imaginary foe to scare the public with. Trillions of dollars have since been spent in fighting this enemy, created to distract attention from the real enemy.

The financial deregulation initiated in the Reagan-Thatcher era in the 1980s was supposed to create prosperity. In fact, it has resulted in a sky-rocketing rise in inequality. The gap between the richest and the poorest has become larger than ever witnessed in history. Countless academic articles and books have been written to document, explain and attempt to provide solutions to the dramatic increase in inequality. The American public does not need these sophisticated data and theories; it experiences the fact, documented in The Wall Street Journal, that the quality of jobs and wage earnings are lower today than they were in the 1970s. Growing public awareness is reflected in several movies about inequality. For instance, Elysium depicts a world where the super-rich have abandoned the ruined surface of the planet Earth to the proles, and live in luxury on a satellite.

The fundamental cause of growing inequality is financial liberalisation. Just before the Great Depression of 1929, private banks gambled wildly with depositors’ money, leading to inflated stocks and real estate prices. Following the collapse of 1929, the government put stringent regulations on banking. In particular, the Glass-Steagall Act prohibited banks from speculating in stocks. As a result, there were few bank failures, and widespread prosperity in Europe and the US in the next 50 years. Statistics show that the wealth shares of the bottom 90 per cent increased, while that of the top 0.1 per cent decreased until 1980. To counteract this decline, the wealthy elite staged a counter-revolution in the 1980s, to remove restrictive banking regulations.

As a first step, Reagan deregulated the Savings and Loan (S&L) Industry in the Garn-St Germain Act of 1982. He stated that this was the first step in a comprehensive programme of financial deregulation, which would create more jobs, more housing and new growth in the economy. In fact, what happened was a repeat of the Great Depression. The S&L industry took advantage of the deregulation to gamble wildly with the depositors’ money, leading to a crisis which cost $130 billion to the taxpayers. As usual, the bottom 90 per cent paid the costs, while the top 0.1 per cent enjoyed a free ride. What is even more significant is the way this crisis has been written out of the hagiographies of Reagan, and erased from public memory. This forgetfulness was essential to continue the programme of financial deregulation which culminated with the repeal of the Glass-Steagall Act, and the enactment of the Financial Modernization Act in 2000. Very predictably, the financial industry took advantage of the deregulation to create highly complex mortgage-based financial instruments worth trillions, but with hidden risks. A compliant ratings industry gave these instruments fraudulent AAA rating, in order to sell them to unsuspecting investors. It did not take long for the whole system to crash in the Global Financial Crisis (GFC) of 2008.

Unlike the Great Depression of 1929, the wealthy elite were fully prepared for the GFC 2008. The aftermath was carefully managed to ensure that restrictive regulations would not be enacted. As part of the preparation, small media firms were bought out, creating a heavily concentrated media industry, limiting diversity and dissent. Media control permitted shaping of public opinion to prevent the natural solution to the mortgage crisis being implemented, which would have been to bail out the delinquent mortgagors. Princeton economists Atif Mian and Amir Sufi have shown that this would have been a far more effective and cheaper solution. Instead, a no-questions-asked trillion dollar bailout was given to the financial institutions which had deliberately caused the disaster. Similarly, all attempts at regulation and reform were blocked in Congress. As a single example, the 300-page Dodd-Frank Act was enacted as a replacement for the 30-page Glass-Steagall Act. As noted by experts, any competent lawyer can drive a truck through the many loopholes deliberately created in this complex document. This is in perfect conformity with the finding of political scientists Martin Gilens and Benjamin Page that in the past few decades, on any issue where the public interest conflicts with that of the super-rich, Congress acts in favour of the tiny minority, and against public interest. Nobel Laureate Robert Shiller, who was unique in predicting the GFC 2008, has said recently that we have not learnt our lesson from the crisis, and new stock market bubbles are building up. A new crash may be on the horizon.

While billions sink ever deeper into poverty, new billionaires are being created at an astonishing rate, all over the globe — in India, China, Brazil, Russia, Nigeria, etc. Nations have become irrelevant as billionaires have renounced national allegiances and decided to live in small comfortable enclaves, like the Elysium. They are now prepared to colonise the bottom 90 per cent even in their own countries. The tool of enslavement is no longer armies, but debt — both at the individual and national levels. Students in the US have acquired trillion-plus dollars of debt to pay for degrees, and will slave lifetimes away, working for the wealthy who extended this debt. Similarly, indebted nations lose control of their policies to the IMF. For example, ex-Nigerian president Olusegun Obasanto said that “we had borrowed only about $5 billion up to 1985. Since then we have paid $16 billion, but $28 billion still remains in interest on the original debt.”

Like the gigantic and powerful bull, each pass through a financial crisis wounds the bottom 90 per cent by putting them deeper in debt, while strengthening the matador of the top 0.1 per cent. Sometimes, the bull can surprise the matador by a sudden shift at the last moment. On this thrilling possibility hangs the outcome of the next financial crisis: the masses achieve freedom from debt slavery, or the top 0.1 per cent succeeds in its bid to buy the planet, and the rest of us, with its wealth.

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Karl Marx said that “The advance of capitalist production develops a working class which by education, tradition and habit looks upon the requirements of that mode of production as self-evident natural laws.” Modern economic theory is a tool of central importance in making the laborers and the poor accept their own exploitation as natural and necessary. As explained in greater detail in the next lecture (AM09), Economic Theory argues that distribution of income is

  • FAIR – everyone gets what they deserve, in proportion to what they contribute (the marginal product)
  • NECESSARY – the laws of economics ensure that this is the only distribution which will prevail in equilibrium
  • EFFICIENT – this distribution creates efficient outcomes, and maximal productivity in the economic system.

In fact, as I have argued elsewhere, neoclassical Economic Theory should be labeled as ET1% (Economic Theory of the Top 1%), because it only represents their interests, and glosses over issues of central importance and concern to bottom 90%. Nonetheless, widespread propagation of this theory through university courses, and popular expositions for the general public, are very important in convincing the bottom 90% that the capitalist economic system is the best possible, and their own misfortunes are due to their own bad luck or other defects.

1      Classical Economic Theory

According to classical economic theory, free markets automatically eliminate unemployment, guaranteeing jobs for everyone at a fair wage, consonant with the productivity of labor. In particular, payoff to labor and to capital is perfectly symmetric – both factors get what they deserve. If government tries to regulate the labor market to create better outcomes – minimum wages, better working conditions, labor unions, etc. — it will actually end up hurting laborers. Economists argue that unemployment is due to minimum wage laws, labor unions, and search costs, and not due to free markets themselves.

2      Credit Creation By Banks

Although this is denied by conventional textbooks, banks create money when they make loans. Thus, outstanding credits which banks extend are always greater than their cash reserves (which accounts for the name “Fractional Reserve” banking system). Because bank profits are directly linked to the amount of credit they create, they are incentivized to maximize credit creation, and hence also to maximize the risks of a crisis when depositors panic and ask for money that the bank does not have in its possession. As detailed in “The Web of Debt” by Ellen Brown, financiers created artificial banking crises to scare the public into creating the Federal Reserve Bank in 1914, with the duty of bailing out banks in trouble, by extending them loans to cover their shortfalls. The FRB was created to prevent banking crises, but it actually led to biggest crisis of 20th century, the Great Depression of 1929 (GD ’29). With the FRB behind them, banks went on a credit creation spree, unconstrained by fears of potential crises. Credit creation is only possible when people want loans, and banks invented many different types of mechanisms to encourage people to borrow. They created “the American Dream” to create a consumer society, and instalment sales to sell loans for all sorts of consumer goods. They went further to encourage people to borrow in order to invest in stocks and land so that money can be made through speculation. This was the cause of roaring 1920’s, also known as the Gilded Age, when those with access to finance got very rich very fast.

3      The Great Depression

Like all artificial booms created by speculation, not backed by any real factor, the financial bubble burst in a stock market crash in 1929. The Great Depression was the worst economic crisis in American history, one that profoundly affected every area of American life and left psychic scars that still affect millions of families. With unemployment insurance nonexistent and public relief inadequate, the loss of a job meant economic catastrophe for workers and their families. By 1930, 4.2 million workers, 9 percent of the labor force, were out of work. Unemployment struck families by destroying the traditional role of the male breadwinner.

4      Two Revolutions

After Great Depression two revolutions took place of which first was regulation of financial industry and second was in economic theory.  Among the financial regulations, an important one was the Glass-Steagall act which prevents banks from speculation in stocks. Banks were prohibited to compete, and restricted to operate in one state only. The Chicago Plan to eliminate fractional reserve banking, and move to a 100% reserve system was also proposed and approved by a hundred and fifty economists of the time, but the financial lobby successfully blocked its passage.

The second revolution, in economic theory, was launched by Keynes. He said unemployment is not eliminated by free markets. So, the ideas of classical economic theory that supply and demand automatically eliminates the unemployment is wrong and government needs to intervene to get full employment. Keynes also punctured myths about money propagated by ET1%, namely the money is neutral, and has no real effects on the economy. This myth – that money is veil you must push aside in order to look at the workings of the real economy – is very useful to the 1% to hide the crucial role that money plays in funneling wealth to the rich, and in exploiting the poor.

5      Effect of Twin Revolution

Financial Regulations constrained the power of big money, and government policies to achieve full employment helped improve the lot of the bottom 90% substantially. The graph below shows how the share of the top 10% dropped drastically from 1940 to 1980 (start of the Reagan-Thatcher era). In the roaring twenties, the power of finance led to the rising share of top 0.1% creating the gilded age. Incidentally, it is important to note that the concept of GNP per capita systematically prevents us from looking into inequality because it takes all of the wealth that is produced in a country and distributes it equally among whole population. This is also part of ET1%, the systematic deception required to keep the bottom 90% content with its lot.

chart-01

Chart from The New Yorker: Piketty in Six Charts

After 1929, after the two revolutions took place, the share of bottom 90% started to rise and that of to 0.1% stared to go down. Top 0.1% were very unhappy from this state of affair and plotted a counter revolution. The master strategist, Milton Friedman, said that change can be created during a period of crisis (see The Shock Doctrine). So, the 1% prepared their theories and economic plans, and patiently waited for a shock. The Oil Crisis of 1970’s led to stagflation created the opportunity for Chicago school free market economists to discredit Keynesian theory. In fact, stagflation was due to cost-push inflation instead of demand-pull inflation, and Keynesian theory can easily be adapted to explain it. However, due to a large number of pre-planned and co-ordinated strategms on multiple fronts, Chicago School theories of free markets, as well as policies, became dominant after this crisis. (see Ideological Macroeconomics and Increasing Inequality.) As the graph shows, de-regulation of finance, and de-empowerment of labor lead to increasing wealth share of the rich, and declining share of the poor.

6      Consequences of Counter-Revolution

Due to counter-revolution in the 1970’s and 80’s, the distribution of wealth entirely changed. Only top 20% of the USA got 90% of total wealth, second 20% got 9.4% of the total wealth, third 20% have only 2.6% of total wealth in USA while the bottom 40% have -0.9% of wealth which means they are in debt actually with negative wealth. This is the income distribution that currently exist in USA after counter revolution by free market propagators.

Gradually, the effects of BOTH revolutions were reversed. The Quantity theory of money was re-implanted after its rejection and refutation by Keynes. The standard theory of labor currently being taught does not recognize the possibility of involuntary unemployment that Keynes introduced. (see The Keynesian Revolution and the Monetarist Counter-Revolution) Also, the Glass-Steagall act was repealed in 1999, and the Commodity Futures Modernization Act was passed in 2000. This gave an enormous amount of power to the financial lobby, creating unregulated arenas for their activities, and leading to the emergence of a vast “shadow” banking industry. The consequences were exactly the same as before – a spectacular crash only 8 years after the repeal of Glass-Steagall – the Global Financial Crisis of 2007.

So today we have gone around full circle, and stand exactly where we did a century ago, prior to GD ’28, with Pre-Keynesian economic theories about money and labor markets, and pre-Keynesian unregulated financial markets. However there are some important differences. The top 1% is MUCH better prepared this time around. They have blocked all attempts at financial reforms in Congress (unlike the aftermath of GD ’29. They have also battened down the hatches to prevent revolution in Economic Theory, and are using creating strategies to both protect neoclassical theory. Even more worrisome are their efforts create camps within heterodoxy (like INET, MMT, CORE Micro) which will create justifications for wealth even after rejecting neoclassical economics. Thing look much worse for the bottom 89% today.

A 22 minute video covering the ideas expressed above is linked below:

Varian start his intermediate micro text by stating the maximization and equilbrium are the core principles of micro. Krugman recently stated that I am a “maximization and equilibrium” kind of guy. The goal of this lecture is to show that these two principles fail completely to help us understand behavior is a very simple model of a duopoly.

In last lecture (AM03), we introduced a simple duopoly model. Two ice-cream vendors buy ice-cream wholesale and can sell at any chosen price in the park. If they have matching prices, they split customers. Under Perfect Competition assumptions, with Full Information and Zero Transaction Costs, if they have different prices, then all customers go to the lower price vendor. Straightforward analysis of this duopoly model leads to the following conclusions:

  1. There is a huge amount of genuine uncertainty – probability calculations required for expected utility cannot be made. We cannot know how many people will come to the park on any given day. We cannot forecast the weather conditions, which influence the demand for ice-cream, with any degree of reliability. This means that vendors will adopt rules-of-thumb to make decisions, rather than maximize anything. This leads to the use of evolutionary Agent Based Models as the preferred modeling technique.
  2. The strategic calculations we make in the lecture, required by neoclassical theory, are based on EXTREMELY over-simplifying assumptions. In particular, full information eliminates the uncertainty, which in real life, would make estimation of the demand function extremely difficult. Not knowing the demand function, and not knowing the strategy (for price and quantity) that the other vendor will choose, the first vendor cannot possibly calculate profits as a function of his actions. This means that there is no function to “maximize”. The lecture gets over this hurdle by making extremely unrealistic assumptions, to allow us to calculate the demand, so that we can operate in a neoclassical framework. Both sellers know exactly what the other one is doing and exactly how many customers each will get. Furthermore, we show that these are not good approximations, in that when we relax these assumptions, entirely different results emerge.
  3. The relation between my actions, and their consequences, is mediated by an uncertain environment (weather, number of people), and by a strategic reaction (what the other guy will do). Economists use a revealed preference argument (due to Savage, Ramsey, De-Finetti) that “uncertainty” (horse races) can be reduced to “risk” (dice rolls). This allows them to use subjective Expected utility theory to create target function to maximize in conditions of uncertainty. However, I have shown elsewhere that this reduction is not legitimate. The standard Dutch book argument use to reduce uncertainty to risk is wrong. This material is not covered in the lecture; see my paper on “Subjective Probability Does Not Exist”.
  4. By changing the parameters (the fixed costs, variable costs, demand) we can get NO equilibria, unstable equilibria, and multiple equilibria. Knowledge of equilibria does not tell us anything about what will happen in the real world. What is all important for understanding behavior of dynamic systems is the disequilibrium dynamics: how do the vendors behave when out of equilibrium. It is this behavior that determines what will happen – convergence to equilibrium, divergence away from equilibrium, or continuous cycling between multiple equilibrium.
  5. In particular, if we relax the assumptions of full information and zero transaction costs, we find multiple equilibria, including some at which the two vendors charge different prices. This violates the law of one price – the two sellers are identical and selling the identical good, but they charge different prices for it. This is based on the reasonable assumption that even if one vendor charges a higher price, not all customers will leave him to go find the cheaper seller. Either customers do not have information, or they incur transaction costs by walking to the next stall. This shows the extreme sensitivity of supposedly central conclusions of economic theory to the virtually impossible assumptions of full information and zero transaction costs.
  6. The typical configuration of costs and profits leads to a Prisoner’s Dilemma in the Duopoly – both parties can profit by cooperation, by agreeing to charge the high monopoly price. However, the individual incentive is to under-cut the price, which leads to complete capture of a smaller profit. If both parties under-cut, then they both share a smaller profit. This is a “social dilemma”, where pursuit of selfish individual incentives leads to loss to both players. This is exactly the opposite of the “Invisible Hand” where pursuit of selfish motives (supposedly) leads to social benefits. Conventional Textbooks mention social dilemmas, but do not point out the conflict with the glorious Invisible Hand, since that would go against the ideological theme of free and unregulated markets creating efficiency.

To summarize, even in very simple real world situations, “maximization” is not possible because there is genuine uncertainty, which cannot be reduced to risk (quantifiable uncertainty). We simply do not know, and cannot calculate, the consequences of our actions, because there are too many other variables which determine this outcome. In addition, as studies of dynamic systems reveal, behavior in such systems is governed by disequilibrium dynamics, and not by the equilibria. In complex systems, study of the equilibria will not reveal any interesting aspects of the behavior, showing the economists must study what happens out of equilibrium to understand how the economy will behave. Thus “maximization” and “equilibrium” are not useful tools to study the behavior of even very simple economic systems. Furthermore, the central teaching that if every is free to maximize, this leads to socially optimal outcomes is directly violated in Prisoner’s dilemma situations where pursuit of individual profits cause harm to society, and even to the individual selfishly pursuing his own profits. Thus the main rhetorical strategy of conventional textbooks is to HIGHLIGHT the polar extreme cases where theory of perfect competition holds, which supports their ideological stance. A vast range of cases which deviate, even slightly, from this PERFECTION, are completely neglected and ignored, because they lead to situations where free markets create bad outcomes. Overcoming market failure requires either government intervention, or utilization of social dimensions of human behavior – humans know how to cooperate, and to sacrifice individual/personal gains for welfare of society. Both of these ideas go against the core ideology of conventional textbooks and hence are not pointed out.

Link to Video-Lecture and a detailed 3500 word outline/summary is given below

asadzaman.net/am04-duopoly/

Building on the analysis of Supply and Demand in Chapter 3 of Hill and Myatt’s Anti-Textbook, this lecture constructs a very simple model of monopoly and duopoly, to show that policy implications in these cases differ dramatically from what conventional textbooks teach. The higher level goal is to teach students Meta-Theoretical thinking. This goes beyond the binary logic which lies behind conventional textbooks, which teach student to think in terms of whether theories are true or false, or even instrumental – enabling you to formulate policy and welfare questions. In Meta-Theory, we try to step back and ask questions about who created this theory, in what historical context, which groups did it help, and which did it hurt, and what will the effects be upon us and upon the world, if we decide to affirm these theories for use in our personal lives, and to shape our societies?
The Hill and Myatt Anti-Text is ideally suited to this goal, since it is directly a meta-analysis of the message contained in conventional textbooks, and brings out the implications hidden beneath the surface of the analysis. In particular, the Anti-Text helps us to understand the rhetorical strategy used by conventional textbooks to convince students of theories which are overwhelmingly contradicted by empirical evidence.
BTW, it is worth pausing here to admire the efficiency with which economists succeed in creating such deep brainwashing that mountains of empirical evidence fail to move the faith of the true believers. For Real-World economists, it is very important to study these rhetorical strategies, as exposing this framework is an important component of the De-Programming techniques which are required to reverse the effects of this brainwashing.
Getting back to AM03, the two central META-Questions that we focus on are the following:
1. What are the rhetorical strategies used by conventional textbooks to create the dramatically false and misleading belief that Supply and Demand framework is universally applicable in terms of understanding how markets work?
2. WHY do textbooks want students to believe in Supply and Demand, when this theory is easily proven false?
The methodology used in the lecture is to create a VERY SIMPLE model of a monopoly, one which can be easily understood directly and intuitively by students. We talk about an ice-cream seller in a Public Park, who is the sole vendor of ice-cream. He purchases his ice-cream wholesale at PKR 25, and can sell it for various prices, but the demand will be reduced if he charges higher prices. The rhetorical point in using such models is that conventional textbooks, of necessity, work in IMAGINARY worlds, which cannot be understood intuitively – this is because the theories that they are trying to sell to the students are patently false in any real world context and scenario. That is why, we build on strengths by using REAL WORLD examples to oppose the IMAGINARY scenarios of conventional textbooks. Setting up and examining this example leads to the easy realization of the following key points which we try to convey to the students in this lecture:
1. The main issues facing the monopolist is a large amount of uncertainty and random fluctuations in the demand for ice-cream. The idea of MAXIMIZATION, which requires a KNOWN demand function, simply is not possible for the ice cream vendor. How can he possibly know or learn the demand function, which is dependent on vagaries of the weather, and people? INSTEAD, rule and heuristic based behavior is the only realistic possibility; this possibility is what Agent Based Models implement. (Striking a blow against the MAXIMIZATION idea).
2. Nonetheless, we play along with the conventional textbooks and pretend that somehow the demand function is fixed and known. Then it is clear that the monopolist has the power to set prices, and hence does not have a SUPPLY function. Furthermore, the profit maximization equilibrium does not maximize social welfare. It is clear that REGULATING prices, setting a ceiling price that he can charge, will actually improve social welfare, making more ice-cream available to larger number of customers at cheaper prices, while still allowing fair profits to the monopolist.
The above lessons emerge in an example that is easily understood directly and intuitively by students. Next we focus on the rhetorical aspects.
1. Given that S&D does not hold in monopolies, and more generally in any markets where firm set prices, why is the model given such prominence in textbooks? Before proceeding to apply S&D analysis, should we not ask the question as to whether or not firms have market power, so that we can be sure that there is a supply curve to analyze?
2. The policy implication that setting a price ceiling below observed market equilibrium will lead to shortages is based on S&D and exactly the opposite is true in monopolistic markets. Before dogmatically opposing prices ceilings, should we not try to find out the extent to which perfect competition applies in these markets?
Hill and Myatt also examine the rhetorical strategy used by textbooks to convince students of universal applicability of Supply and Demand. The S&D model is introduced very early, and used throughout the textbook. Problems with and exceptions are mentioned very late in the textbook, and the qualifications required to use S&D never mentioned. Thus the students get the impression that S&D is universally applicable, even though the model works only under conditions of perfect competition. The next lecture AM04 examines a duopoly model in detail and shows that the assumption of full information and zero transactions costs are ESSENTIAL to supply and demand – slight violations, with less than full information, and more than zero transaction costs – lead to complete breakdown of supply and demand. Thus a very fragile special case is presented as the central model for analysis of markets. WHY? Because this is the ONLY case in which markets work well without regulation. IN ALL OTHER CASES, markets require regulation and government interventions improve social welfare. Since the GOAL of textbooks is to prove efficiency of markets and to prove that government interventions are always harmful, they have no choice but to present S&D as the sole model with universal applicability.

For the 90 minute Video-Lecture, together with a 2500 outline and summary, see:

AM03: Monopoly

2nd Lecture (90min) on Advanced Microeconomics at PIDE, (14 Sep 2017). While planning to teach a heterodox micro course, I was faced with the dilemma of choosing a suitable textbook. Interestingly, there are many options available, but I was not happy with most of them. Some were too mathematical for my taste, some made too many concessions to conventional micro while being critical of it, and some were simply not suitable for use as texts. Eventually, I decided to use Rod Hill and Tony Myatt’s: The economics anti-textbook: a critical thinker’s guide to microeconomics. Zed Books Ltd., 2010. I am very pleased with this choice. It provides contact with conventional micro that we need, together with a critique that is easy to understand, and can be used as a basis for construction of good alternative approaches.
I started the course (first lecture was preliminary introduction to methodology and approach) by covering Chapter 3: How Markets Work (In an imaginary world) of the H&M anti-textbook. This chapter attacks the central Supply and Demand model which is at the heart of mainstream micro in a beautiful and elegant way. I am impressed! I have myself written what I thought (and still think) is a very good critique (see The Conflict between General Equilibrium and the Marshallian Cross). I have also seen other critiques (like Sraffa). But H&M pointed out an angle that I had not considered before. They survey conventional textbooks to pick out the main message being conveyed in the S&D model and its policy implications. Then they show that the S&D model is heavily dependent upon the assumptions of perfect competition, which require small price-taking firms, full information and zero transaction costs. All conclusions of S&D and policy implications fail when firms have market power, and the reverse policy ocnclusions can be easily derived. As a RHETORICAL strategy, firms use S&D as a universally applicable model, do not caution students about its limited applicability. It is in fact easy to show, with very simple examples, that even slight violations of the perfectly competitive markets assumptions lead to the complete failure of S&D analysis. HONESTY would at least require textbooks to ASSESS a market to see if it satisfies the assumptions required for validity of S&D. However, because textbooks have a hidden ideological agenda, they fail to mention any restrictions on applicability of S&D. Not only that, but they actually use Oligopolistic markets with large firms to illustrate S&D, which is simply wrong, since S&D does not work in such markets. As a result, students go away from Micro courses with the impression that S&D works in all markets.
WHEN we can easily display these flaws, and especially when we can destroy the S&D model, as H&M effectively do, this is of substantial value in training student to step outside the box of neoclassical orthodoxy. When students realize that they have been duped, it incentivizes them to distrust orthodoxy. This is what the first few lectures in my course attempt to do. At the same time, I try to teach them about viable alternative approaches.

LINK for (1) brief summary, (2) Video Recording (90min) and (3) Longer Outline and Summary (2500 words) of 2nd lecture in Advanced Micro based on Chapter 3 of Hill & Myatt’s Anti-Textbook

https://asadzaman.net/am02-sd-models/

At the heart of modern economic theory is the micro-economic model of homo economicus, who is cold, calculating and callous. This picture of humans as heartless rational robots is what leads to “Poisoning the Well: How Economic Theory damages our moral imagination” (Julie Nelson). I have provided a thorough critique of neoclassical utility theory in my paper:  The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature,” International Journal of Pluralism and Economics Education, Vol. 3, No. 4, 2012, pp. 366-414. However, as Thomas Kuhn noted, paradigms cannot be changed by critiques; they can only be changed by providing an alternative paradigm. Thus to oppose neoclassical utility theory, we need an alternative model for human behavior. For western theorists, a natural alternative is the secular humanist model, which allows for a wide range of cognitive and emotive functions not captured in economics. For my purposes, Islam provide a more relevant model of human beings as having spiritual, emotional and rational dimensions. This model speaks directly to my audience. (see also “Spirituality and Development“)

It is also true that, regardless of how we try, it is impossible to do economics without notions of morality, justice, equity and fair-play. Currently economics pretends to be positive, which means that it sneaks in very questionable (indeed, poisonous) value judgments (like that of Gauthier) into the framework, without explicit discussion. I have explained how the apparently objective concept of scarcity is actually built upon hidden foundations of three major value judgments about exogeneity of tastes, sacredness of property rights, and the idea that (unobservable) human welfare directly corresponds to  (observable) human choice behavior:; see  the normative foundations of scarcity.real-world economics review, issue no. 61. 22. Again to oppose neoclassical micro, we must introduce an alternative ethical and moral framework. Here again it suits my purpose and my audience to use an Islamic framework for this purpose.

Below, I provide a link to a summary of the first lecture I gave, in a unique course on Microeconomics. Unlike Western epistemology which takes all knowledge as useful, Islam differentiates between useful and harmful knowledge. I am teaching the students that conventional micro is “Harmful” knowledge, which damages our natural tendencies for compassion and kindness, and teaches us to be selfish. It teaches us to accept poverty, misery, injustice, and exploitation as natural outcomes of an ideal economic system. The link below provides (1) a very brief summary of the lecture, (2) a link to the 91min video of the actual lecture, and (3) a more detailed 2500 word outline of the lecture, for people who dont have time to watch/listen to the 90 minute lecture.

https://asadzaman.net/am01-introduction/

 

 

 

 

 

Reproduced from:

Zaman, Asad: Book Review of Friedrich A. Von Hayek’s Road to Serfdom, Journal of Islamic Business and Management, vol 3, no 1, 2013. road2serfodom

The Road to Serfdom is the book written by the famous economist F. A. Hayek (1899-1992), the recipient of the US President’s Medal of Freedom in 1991 and co-winner of the Nobel Memorial Prize in Economics in 1974. Originally published in 1944, the book is among the most influential and popular expositions of market economy, selling over two million copies, and remaining a best-seller. F. A. Hayek warned of the danger of tyranny that may result from government control of economic decision making through central planning. He argued that the abandonment of individualism and classical liberalism inevitably leads to a loss of freedom, the creation of an oppressive society, the tyranny of a dictator and the serfdom of the individual.  A classic work in political philosophy, intellectual and cultural history, and economics, The Road to Serfdom has inspired and infuriated politicians, scholars, and general readers for over six decades.

However, The Road to Serfdom has been criticised as well on the ground that unfettered markets have undermined the social order and that economic breakdown had paved the way for the emergence of dictatorship. The present review is also a critique on the book taking evidence from the history that the facilitator’s role of the State requires the rulers / regulators to take remedial measures for the promotion of social interest, if individual interest is in conflict with it.  The classical individualism and liberalism promote selfishness that must be distinguished from the value based ‘self interest’ which requires that one should be conscious of the interest of others and should avoid hurting them. The State is required to adopt a policy mix of market based competitive system along with the core value of justice and fair play.

Historical Background

Western social science is intimately tuned to Western history. The emergence of Social Science in the West was coincident with the loss of faith in the West, referred to as “Death of God” by Nietzsche. Loss of Divine Guidance forced fresh thinking about human nature. Hobbes thought that the natural state of humans was a “war of all against all”; the state or government was necessary to intermediate this conflict and bring about a peaceful outcome. In contrast Locke granted rights to men and thereby limited the rights and powers of the government. These early philosophers became the precursors of substantially different views on the crucial of issue of the appropriate balance between the powers of the government and individual liberty.

The Liberal Tradition: Hayek is squarely within the liberal tradition, a particular kind of social and political philosophy espoused by British and Continental thinkers such as John Locke, Baron de Montesquieu, David Hume, and Adam Smith, and American thinkers such as Thomas Jefferson and James Madison.  In essence, these classical liberal thinkers were committed to three types of freedom: economic freedom, political freedom, and freedom of speech and religion.  For classical liberalism, freedom meant severely limiting the power and scope of invasive government, thus increasing the scope for individual and private action.
 “Unintended Consequences” of Socialist Policy: Hayek presents a sophisticated and subtle defence of liberalism, but could not escape the influence of the horrifying World War II which he lived through in formulating his philosophies. One the main themes of the RtS is the “the law of unintended consequences”. Hayek contends that well-intentioned German socialists created government controls to help the poor and bring about desirable social reforms. However these government policies, like Frankenstein’s monster, went out of control and led to the emergence of Nazi-ism. He foresees the same process occurring in Britain, and warns that similarly well-intentioned efforts to help the poor would lead to powerful governments and Serfdom in Britain. Part of his prophecies came true in that the Labor Party did come to power in Britain and did pursue and implement many socialist policies including nationalization of industries and socialized medicine. However, there was no apparent resultant loss of individual liberty in UK that Hayek thought would inevitably result[2]. Subsequently, the Thatcher government reversed most of the nationalizations but left the socialized medicine system intact.

Intended Consequences of Socialist Policy: While the “unintended consequences” Hayek warned about did not emerge, the intended consequences were very prominent. The lot of the sick in UK, Europe and Canada, with socialized medicine, is substantially better than that of the USA, where private medicine leaves a large proportion of the poor population uncovered in medical emergencies. Studies have shown that large proportions of people who fall into poverty do so as a result of medical problems. There is substantial evidence showing that quality of life of the poor is much worse, and their percentage much greater in the USA than in European countries which have adopted many socialist type policies for the benefit of the poor. Taken in the context of post World War II policy making, which is the narrow context for Hayek’s RtS, it seems clear that Hayek was dangerously wrong. Had Hayek’s warnings been heeded, the lives of vast numbers of the poor in Europe would have been miserable, and human suffering would have increased. European countries did implement socialist policies and provide substantially more support to the poor than USA, but none of them slipped into Nazi-ism or the Serfdom that Hayek thought would result. A glaring counterexample to Hayek is provided by the Scandinavian countries, and most prominently Sweden, who have most aggressively pursued socialist policies of the kind held to be dangerous and damaging both to long run economic performance and to individual freedom by Hayek. As a group, these economies have done better in terms of growth, unemployment and inflation, and also have had higher rankings in terms of various measures of political and individual freedom, than other European economies with less socialist policies [see Rosser (2004)].
The Larger Debate: Free Markets. We next consider the broader context for RtS, namely the debate about whether markets should be regulated by the state, or whether they should be allowed to operate freely as the liberals advocate. There is overwhelming empirical evidence on all aspects of this debate. It is clear that markets do well at some thing. In terms of creation of wealth, and efficient fulfilment of demands and desires of the rich and powerful, markets work very well. However, markets fail at providing equitable income distributions or adequate support to the poor. As the remarkable studies by Amartya Sen have shown, a fully functioning free market and adequate food supplies are perfectly compatible with famines which lead to death by hunger of large masses of people. The emergence of Keynesian doctrines in the 1930s was due to the Great Depression which showed again very forcefully to a very large number of people that market outcomes cannot be trusted to deliver the goods, i.e. economic welfare. This clear and overwhelming evidence was so strong that Hayek and all liberal thinkers were eclipsed until horrors of the depression had faded from memories. Only in the late 70’s, some 40 years after the Great Depression was there a revival of fortunes of liberal thought. It appears strange that these neoclassical liberals have learnt nothing from experience. They insist that markets equilibrate very fast, and that unemployment will be quickly eliminated by free market mechanisms. Even ignoring the Great Depression, the experience of Chile under the Chicago Boys, where unemployment remained at around 20% during fourteen years of ultra liberal policies is enough to show that this is not true (see Rayack (1984)). Similarly, liberals are still developing theories to account for the failure of Russia to respond quickly to free market mechanisms, and the subsequent economic disaster leading to massive poverty, heavy unemployment and a fall in productive output of more than 60%. The liberals make much of the argument that central planning requires information typically unavailable and hence leads to inefficiencies. However, they have never considered or calculated the time taken and the cost of reaching the efficient market equilibrium, which is borne by the poor and unemployed in the form of hunger, suffering and misery.

Power/Knowledge: Given overwhelming empirical evidence that unregulated markets often deliver disastrous outcomes, leading to misery, hunger, death and exploitation for masses of people, what accounts for repeated insistence of liberal theorists that “markets work”? Surely this message, frequently made with emphasis in nearly all standard economic textbooks, deserves some qualifications and refinements, together with some explanation of contrary empirical evidence. However, typical texts sweep all contrary evidence under the rug, rather than treat it with intellectual honesty. This leads one to reluctantly consider Foucault and his explanation of the link between (actually the identity of) Knowledge and Power. The naïve view is that Knowledge consists of understanding phenomena, and validity or truth of the knowledge depends on how accurately it describes the reality. Many case studies done by Foucault and his followers show that Knowledge consists of rules of manipulating reality to achieve desirable results (Power). When considered in the context, the repeated re-emergence of liberal thought, despite repeated and massive failures on the empirical front, makes perfect sense. In all ages, social requirement of justice, equity, compassion for the poor and other social norms (including environmental issues) place powerful restrictions on the scope of actions available to the rich and powerful. Liberal thought, and the message that Laissez Faire leads to optimal social outcomes, is a strategic tool which is helpful in removing these restraints. The rich and powerful have access to media, can fund colleges and think-tanks etc. and therefore produce “knowledge” that will enhance the power of this group.

An Ironic Twist: Recent post 9/11 US experience provides an ironic twist on the central message of Hayek’s RtS. Nearly all of the signposts on the Road to Serfdom identified by Hayek can be found in some form or the other in the curtailment of personal freedoms in the USA, supposedly as a defence against terror. People have been arrested and imprisoned for talking against US policies. The radical curtailment of individual freedom in the “Patriot Act” is a source of concern to many liberal thinkers. The irony is that the apparent cause of this path to Serfdom in the USA is not socialist policy but the pro-free market and laissez faire policies pursued to the extremes in the USA. Relentless pursuit of profits by US and multinational firms, unrestrained by any considerations of equity and fairness, has created tremendous amounts of social injustice, poverty, exploitation, etc.  The attempts to squelch popular protest against such market-friendly policies has led to police-state like policies in the USA bearing a striking resemblance to those described by Hayek as being signposts on the road to Serfdom. It has also been suggested that the market itself enslaves vast numbers of humans, reducing their lives to endless drudgery in the name of greater profits and production. It would appear that there is more than one road to Serfdom, and one of the roads is extreme laissez faire advocated by Hayek and his followers.

Lessons from European History: One important reason for considering the context for Hayek and its critique is to show that it is deeply grounded in European historical experience. It has been a European conceit that their experience is somehow universal, and hence lessons from it applicable to all societies. One of these lessons is that the liberal tradition, with maximum individual freedom, is the ideal state which all societies will ultimately achieve. Indeed, the collapse of Russia led to the (premature) celebration of “The End of History” by Fukuyama – history is about to achieve its goal of leading all societies to conform to the ideal European culture with maximum individual freedom for all.  [ see link for: Conclusions & References ]

For more material on the urgent need to develop an alternative to Eurocentric Social Science, which completely ignores humanity, morality and spirituality, leading to devastation of communities and environment, see: An Islamic Approach to Humanities. (also available from Academia)