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This post provides a summary of my first lecture, and links to the entire course of 30 lecture, on an Islamic Approach to Microeconomics. The first half of the course is based on Hill and Myatt Anti-Textbook of Micro. Teachers who wish to develop alternatives to conventional courses should find this material useful.

An Islamic WorldView

In Fall 2017, I taught the standard Ph.D. first semester course on Micro-Economics using an Islamic Approach. The first lecture, summarized below, explains why an Islamic approach makes a huge difference to the study of Micro. The whole set of 30 lectures for the entire course, together with slides, references, notes, and supporting materials (link: Advanced Microeconomics)    is freely available for ANY teacher who would like use and adopt this approach for their own courses in Microeconomics. I would be happy to provide any necessary support to teachers would like to try this novel experiment. I can promise that the students will very much enjoy this approach, because it speaks directly to the heart, and can easily be understood — in contrast to conventional micro, which just involves memorizing math, and learning things about human behavior which are patently false. [shortlink: bit.do/aziam]

90min English Video-Lecture on YouTube. 2500…

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Core (the acronym for Curriculum Open Access Resources in Economics) is a project led by professor Wendy Carlin from UCL, UK, that aims to improve the content and delivery of the economics curriculum around the world. Other remarkable economists have been and are part of this project such as Diane Coyle and Samuel Bowles.

According to the website of the project, www.core-econ.org CORE is:

“a) a global community of learners, teachers and researchers;

  1. b) a problem- motivated and interactive way to learn economics;
  2. c) bringing recent developments into the classroom;
  3. d) giving everyone the tools to understand the economics of the world around   them”.

As Mearman et al (2016: 5) explain: “CORE is a large undergraduate year one course called ‘The Economy’, which itself comprises nineteen modules on a range of topics. CORE is neither a Massive Online Course (MOOC) nor a course in the traditional sense, but an online resource, a frame to be elaborated”. According to the same authors, CORE represents both an ‘improvement’ and a ‘missed opportunity’. On the one hand, CORE employs historical and experimental data and draws on the history of economics or new branches of economics such as theory of games, covering thus a variety of topics. On the other hand, the course is rife with concepts and elements unsupported by evidence, such as utility maximization that constitute fundamental components of CORE (Mearman et al 2016).

The reactions to CORE, both from the media and the academic world, have been mixed. Whilst Birdi (2014) claims that CORE represents a transformation of economics, others consider the shift brought by CORE as insufficient and inadequate (e.g. Post Crash Economics Society (PCES) 2014; Morgan 2014; Mearman et al 2016). The extensive use of data to explain economic phenomena is recognized by Giugliano in Financial Times (2015) (https://www.ft.com/content/fc2eb464-d93d-11e4-b907-00144feab7de), who also acknowledges voices that echo the lack of radicalism in the CORE project (e.g. Rethinking Economics). John Cassidy (2017) in the New Yorker states: “The CORE approach isn’t particularly radical (students looking for expositions of Marxian economics or Modern Monetary Theory will have to look elsewhere)”.

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In part 1 of this article (Understanding Macro: The Great Depression (1/3), we saw that Keynes challenged classical economics on many fronts. Against the classical idea that free markets will automatically eliminate unemployment, he argued that governments needed to adopt appropriate fiscal and monetary policy in order to create full employment, as a necessary condition for high economic growth. He also argued that money is not neutral, and that there is fundamental uncertainty about the future.  Widespread acceptance of Keynesian economics was one of the two major ingredients that led to prosperity in Europe and USA after World War II. We start with a discussion of the second ingredient, which was strict regulation of financial institutions.

It was obvious to all that irresponsible lending had caused the Great Depression. The creation of the Federal Reserve Bank in 1914 allowed banks to create credit freely. Banks could provide loans to anyone who asked for it, without minimal backing in cash reserves, since the Fed would provide them with cash in case of any shortfall in reserves. This was a windfall for the private banking sector, since they could provide credit for loans at zero cost to themselves, simply by making an entry on their books. Banks capitalized on this opportunity by creating a debt-based boom in the economy. Consumers were encouraged to buy everything, especially real estate, housing, and stocks on credit. Easy availability of loans created a boom in economy, referred to as the roaring twenties. As prices of land and stocks increased, people rushed out to get loans to buy more, in order to get a share of the easy profits due to soaring values. Eventually, a stock market crash in 1929 punctured this bubble, leading to the Great Depression of 1929. About 11,000 of 25,000 banks collapsed, wiping out the life-savings of millions, since there was no deposit insurance at the time.

The Great Depression was a massive crisis, a man-made disaster of unimaginable proportions. The stock market crash of 1929 set off a worldwide chain of bankruptcies and defaults. Factories and businesses closed, workers plunged into poverty in millions, houses and farms were repossessed, crops which could not be sold were dumped into the sea. By late 1932, manufacturing output had fallen to half its 1929 level, and some 30% of workers  searched in vain throughout the country for jobs to support their families. Farmers unable to sell their produce, unable to repay their bank loans were evicted and with their families joined the human flood of misery. Keynes wrote that ‘we are living in the shadows of one of the greatest economic catastrophes of modern history’. In pattern worthy of note, the shock of the Great Depression created the possibilities of radical changes in ways of thinking, and in the structure of policies and institutions.

In the aftermath of the Great Depression, very stringent regulations on banking were passed by Roosevelt, after he was elected in 1932. It was clear that this was required, since banks have an incentive to gamble with other people’s money. When they make gains, they can pocket them. Losses are passed on to the depositors. To prevent this, the Glass-Steagall Act prohibited the banks from investing in stocks, and in many other types of speculation that had been responsible for the Great Crash. The effectiveness of banking regulations is shown by absence of large scale bank failures for nearly fifty years. Repeal of regulations in the Savings and Loan sector by Ronald Reagan let to the first massive banking crisis in the 1980s, which wiped out the profits of the entire banking sector for this fifty year period. Nonetheless, the de-regulation of banks continued, culminating in the repeal of Glass-Steagall in 1999, followed by the Commodity Futures Modernization Act of 2000, which created an unregulated financial sector. It took only seven years for the natural consequence, the Global Financial Crisis of 2007. But this is moving ahead of our story.

Going back to the post-war period, Central Banks all over the world started following Keynesian prescriptions for monetary policy. Keynesian theories suggested that if the rate of growth of money was lower than required by economic growth, it would lead to recession and unemployment. If it was higher than required, it would lead to inflation. Thus, the job of the Central Bank was to keep the money supply at just the right rate required to maintain full employment, while avoiding inflation. In conjunction with strict regulation of the financial sector, Keynesian policies worked like a charm for almost three decades following the second world war. Because of full employment everywhere, USA and Europe enjoyed a golden era of high growth which enriched the masses, and created unprecedented levels of prosperity. But there was a snake in this Garden of Eden, waiting for his chance to strike.

Two deep truths about Capitalist economies were discovered by Marx. One is that the fruits of capitalist production are distributed among classes according to their relative power. As an illustration, a recent study showed that the top 1% captured 85% of the growth over 2009 to 2013. The second truth is even deeper: capitalism works with the consent of the exploited, by persuading laborers of the justice and necessity of their exploitation (see ET1%: Blindfolds created by Economic Theories). Conventional economic theories of the labor market are ideal tools of propaganda for this purpose . These theories, proven false by Keynes and his followers, show that capital and labor both get paid what they deserve, in terms of their contribution to the economic production. Keynesian theories made the government responsible for creating full employment, empowering the masses, and enabling them to escape exploitation by the wealthy. This led to a dramatic rise in general prosperity, and equally dramatic decline in inequality and the wealth share of the top 1%.

The top 1% did not accept this loss of prestige and power, but made patient and far-sighted plans to reverse this situation. As Milton Friedman said “Only a crisis – actual or perceived – produces real change”. They prepared ideologies, theories, institutions and acolytes while waiting for the desired crisis to operationalize their plans. Naomi Klein in “The Shock Doctrine: The Rise of Disaster Capitalism”, has brilliantly described how crises around the globe were used to force free market policies down the throats of an unwilling public. These policies enriched corporations while impoverishing the people and creating massive social disturbances. In the USA, the opportunity to launch a counter-revolution against Keynes came in the 1970s, as we will discuss in the third and last part of this article. It is rather amazing that this counter-revolution was able to turn back the clock, reject all Keynesian advances, and go back to pre-Keynesian theories solidly rejected by empirical evidence.

For the last part, see: Understanding Macro III: The Rule of Corporations

I am reblogging this post, from three years ago, in honor of Bi-Centenary Anniversay of Marx. I would like to add that the Marxist analysis of Capitalism is, hands down, far superior to anything currently being taught in conventional economics courses at Universities today.  For those who would like to pursue it, David Harvey’s Reading Capital is an excellent series of lectures which goes through and explains the Magnum Opus of Karl Marx. It is a deep Marxist insight that Capitalism works not by force, but by persuading the laborers of the necessity, justice, and fairness of their own exploitation. Modern economic theory is the ideal tool for this purpose. To bring out this essential but ignored aspect of economic theory — that it is nothing more than propaganda for capitalism, it is useful to re-label it as ET1% – The Economic Theory of the top 1%. A more detailed analysis of the deceptive nature of ET1% is provided in my sequence of posts on ET1%: Blindfolds Created by Economic Theory

WEA Pedagogy Blog

Published in The Express Tribune, September 7th,  2015.

Ever since its origins in industrialising England, the capitalist economic system has always been subject to crises. There are countless theories as to the causes, consequences, and possible remedies for these. Karl Marx was among the earliest and most famous critics of capitalism. He argued that the source of the wealth produced by capitalism was the labour of the workers. The capitalists use their power to make profits by exploiting workers, depriving them of their due shares of profits. Capitalismrequires growth to prosper, and this could only come by increasing exploitation. Crises would marxoccur when workers would be oppressed beyond their limits. Eventually, these crises would destroy capitalism as the workers revolted against this unfair system.

Of course, these ideas are anathema to capitalists. During my own studies of economics in universities, a shallow caricature of Marxist economics…

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Alfred Marshall wrote in his Principles of Economics that “economic conditions are constantly changing, and each generation looks at its own problems in its own way” (1920, p. v.). Our generation is confronted with many problems including climate change, environmental damage, disruptive innovations, inequality, indebtedness, youth unemployment, besides a health care crisis. At the center of these problems, however, is the discipline of economics itself and economics education.

 

The mathematization of economics was done in the name of science, but in doing so, the mainstream of the academic community has renounced its claim to studying the actual economy. In this respect, it is worth remembering  Keynes’ critique of  the behaviour of pofessional economists at his time since his words are more valuable  than ever,

For professional economists…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…scientists whose theoretical results are confirmed by observation when they are applied to the facts (Keynes, 1936, The General Theory of Employment)

Since the French students’ petition in 2001, several books have been written on how to teach pluralist economics, including John Groenewegen’s Teaching Pluralism in Economics (2007); Edward Fullbrook’s Pluralist Economics (2009); Jack Reardon’s Handbook of Pluralist Economics Education (2009),  and the WEA Conference book The economics curriculum: towards a radical reformulation (2014), among other relevant contributions.  To spread the discussion on how to implement pluralism in the classroom,  the International Journal of Pluralism and Economics Education  and the WEA Pedagogy Blog have been launched. And several global organizations- the Association of Heterodox Economics and the International Confederation of Associations for Pluralism in Economics, for example, have emphasized the need for pluralism.

 

Considering this background, the publication of  Introducing a New Economics: Pluralist, Sustainable & Progressive (Pluto Press, 2017) is welcome.

The authors  – Jack Reardon, Maria Alejandra Madi and Molly S. Catto – demand that the real world should be brought back into the classroom in order to most effectively confront current crises. Indeed, with a firm commitment to theoretical, methodological, and disciplinary pluralism, the authors challenge the institutional education hegemony head on. They believe that economics must play a central role in not only conceptualizing the problems of our generation but also in articulating solutions.

The textbook  Introducing a New Economics calls for a rejection of  the narrow curricula and the lack of intellectual diversity that characterize mainstream economics. The authors believe that economics must be re-conceptualized to focus on three elements:

  • One, economics must comport with sustainability. As they explain in the text, many definitions of sustainability exist, nevertheless, a central element uniting the disparate definitions is an ethical concern for the future.
  • Second, economics must become pluralist, which along with sustainability is another multi-faceted and complex word. Pluralism -understood as respect for different and opposing views- is necessary since there are myriad ways of conceptualizing problems and no one view has a monopoly of understanding.
  • Third, economics must concern itself with justice. Our future is uncertain which requires an economics education that is open-minded and help students to conceptualize and design a more equitable economic system that can provision for all.

 

Visit Pluto Press webiste https://www.plutobooks.com/9780745334882/introducing-a-new-economics/

This post explains why conventional economic advice to developing countries is designed to cause damage to the economies, not to create growth. Similar comments apply to the current predicament of Greece and others trapped in the European Union of High Finance.

An Islamic WorldView

published in The Nation, on 17th April 2018. Summary of Pre-Budget Seminar at QAU on 17th May 2016. 23m Video Recording of Talk:

Many successful examples show that it is possible to achieve high growth. BRICS countries have achieved enviable economic progress. In particular, Chinese workers have gone from using oxen-driven carts to automobiles within a lifetime, while median income has doubled within a decade. Similarly, the East Asian miracle is a recent event. Even our neighbors, India and Bangladesh, have had higher growth trajectories than those of Pakistan.

It is obviously possible to achieve high growth, but it has not been happening. So, what are the obstacles to achieving high growth rates? The greatest obstacles lie not in the lack of material resources, but in the wrong economic theories, which lead us to wrong policy decisions. On the patterns described in “Confessions of an Economic Hit-Man”, powerful international organisations…

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(continuation of previous post on ET1%: Blindfolds Created by Economic Theory)

Economists have performed an amazing piece of magic, successfully creating a mass deception which has taken in the vast majority of the population of the world. Seeing through this complex and sophisticated trick requires separating, studying and understanding many different elements which all combine to create this illusion. One of the elements is a binary theory of knowledge, according to which theories are either true or false, and this is the only characteristic of theories that we should study. This prevents us from looking at the historical context in which the theories originate, and the functions that these theories serve, in terms of advancing the interests of powerful groups in the social struggles then going on. Social theories cannot be understood without this context, and hiding this context, and the relationships between knowledge and power, is an essential component of the WMD — weapon of mass deception — deployed by the economists to create a mass hallucination. In this post we analyze briefly the concept of Scarcity, which is at the heart of modern Economic Theory.

According to this concept, which was made central to Economics by Lionel Robbins in 1932 (Nature and Significance of Economic Science), there are not enough resources to satisfy the unlimited needs and wants of all people. Accordingly, solutions require increasing resources, or economic growth.  On the surface, this seems like a straightforward statement of the factual position: we need more resources in order to take care of the needs of the poor. Hidden beneath this simplicity is a strategy which is massively favorable to the interests of the top 1%. We bring out some of these hidden implications below.

1.     Failure to Distinguish Needs and Wants

Food supplies per capita have been steadily increasing over the past century, contradicting the Malthusian idea that population grows faster than food supply. In fact, as Gandhi said, “There is enough for everyone’s need, but not enough for everyone’s greed.” Today, there are sufficient resources on the planet to amply take care of the basic needs in terms of food, clothing, housing, health and education.  In particular, the money being spent on treatments for obesity is more than sufficient to provide for all the hungry on the planet. This illustrates the general principle that scarcity for some is caused by excess spending by others, and NOT BY LACK OF RESOURCES.  Concentration of wealth in a few hands is the cause of scarcity, and re-distribution, not growth, is the solution.

My paper on “The Normative Foundations of Scarcity” explains how three separate normative principles are built into the hidden foundations of scarcity. One of these three principles is treating needs and wants as being on par; for example, Samuelson and Nordhaus state the economists must strive to satisfy all needs and wants, whether they are genuine or artificial. This means that the desire of the millionaire for an alligator skin briefcase worth $10,000 dollars takes precedence over the demand of poor hungry children for milk and bread, since there is no money backing the latter demand. Furthermore, while genuine needs are satiable, and there is no shortage of resources to provide for all needs, wants are unlimited, and expand as they are fulfilled.

Islam prohibits, rather than encourages, fulfillment of artificial wants (idle desires, or Hawa). This is in direct opposition to Economists views, which tell us to not question or investigate the origin of wants, and treat them all equally.

ET90%: Genuine needs must be distinguished from, and given priority over, artificial wants. The fundamental problem of economics should be: how can we fulfill the (finite, satiable) basic needs of the entire population, rather than attempting the impossible task of trying to fulfill the insatiable wants of those with wealth, especially since these wants keep increasing as they are met.

Islamic principles are aligned with finding from happiness research that additional consumption over the level of basic needs has no correlation with happiness. Conventional economics embodies the ridiculous view that the purpose of our lives is to maximize the pleasure we obtain from consumption. In fact, consumption is just a necessaity for maintaining our lives, and lasting pleasure and fulfilment comes from pursuit of higher purposes. This is recognized by the Mahbubul-Haq and Amartya Sen theories about Human Development as being the goal of development.  For elaboration, see short post on “the Coca-Cola Theory of Happiness,” or the longer explanation in Prosperity as Human Development, not Wealth

2.     Emphasis on Growth rather than Redistribution

By pointing to shortage rather than excess wealth in the hands of the top 1%, scarcity points us in the WRONG direction regarding how to solve the economic problem. It suggests that we need to have additional resources, in order to be able to feed the poor. This ignores the fact the we currently already have enough resources to feed the poor, so the solution must lie elsewhere. It also ignores the fact that amazing growth has taken place over the past century, but the number of the poor has only increased, rather than decreasing. This is because the majority of the fruits of growth are captured by the rich and powerful, rather than going to the poor. For instance, recent research shows that 85% of the gains in growth have been captured by the top 1% over the past decade, while the bottom 50% have not gained anything.

Amartya Sen’s analysis reveals that famines are caused by lack of “entitlement” of the poor to food, rather than lack of food. Thus it is not scarcity, but the libertarian social norms of absolute rights to property, which need to be changed, to solve the problem of poverty.  The fundamental normative choice which must be made is the following: which of the two takes precedence, the right to property or the right to food and basic needs? Economists have sanctified the right to property over the right to food in the form of the Pareto Principle, and assert that we cannot say whether welfare would be improved if we take wealth away from the ultra-rich in order to feed the hungry. However, there are many ways to argue that the right of the poor takes precedence. For example, Cooter, R. and Rappoport, P (1984) ‘Were the Ordinalists Wrong About Welfare Economics?’ Journal of  Economic Literature, 22 (2) June, 1984, pp. 507-530 argue that we can use objective measures of well-being to show that transfers of superflous wealth of the super-rich to those who need it would lead to increased social welfare. Cardinal utility allowed for this type of reasoning, but ordinal measurement led to the idea that we could not compare welfare across persons, which violates both intuition and social consensus to the contrary. We can base a counter to ET1% on this idea.

ET90%: The responsibility of society to take care of basic needs of all members takes precedence over the right to property of the wealthy.

This principle is firmly endorsed by Islamic Economics. The Quran states that the poor have a right in the wealth of the rich, creating the “entitlement” that is identified as the key to prevention of famines by Amartya Sen. The cause of scarcity is the “stoppage” of the circulation of wealth, as commanded in the Quran. When the wealthy concentrate wealth in their banks, instead of allowing its free circulation, they prevent it from reaching the hands and mouths which need it. Islam offers a two pronged carrot and stick approach to the root problem which creates scarcity:

  1. The compulsory payment of zakah at the rate of 2.5% ensures that a small part of the wealth concentrated in hands of the rich should reach the poor.
  2. In addition, generosity is recognized and praised as a virtue, and the rich are encouraged to spend excess wealth on others who are needy.

It is well known that human behavior is strongly motivated by social recognition, and so recognition and praise for generosity create such behavior, which is an essential component of the solution to our economic problem. In fact, as explicitly recognized by Karl Polanyi in the Great Transformation (see also Gertrude Himmelfarb’s The Idea of Poverty), the market society creates poverty as a social problem by removing the entitlement of the poor to social support, so as to  create a labor market. This requires changing social norms so that selfishness and greed become praiseworthy, while generosity become irrational sentimentality. Solutions to problems of poverty require recognition of the subtle inculcation of pro-property and anti-poverty norms, without explicit mention, in ET1%. This conforms exactly to the necessity of deception to fool the poor into supporting ideas which favor the wealthy, which is the hallmark of ET1%.

3.  Scarcity Versus Abundance Thinking

A diverse literature has emerged from different sources which identifies scarcity as a way of thinking, rather than an objective condition. This is the familiar issue of whether the glass is half full or half empty. The insights from this literature conform to the Islamic view that “True richness is the contentment of the heart”. A rigorous analysis of how the psychology of scarcity affects our behavior and decisions, is given in Mullainathan, Sendhil, and Eldar Shafir. Scarcity: The new science of having less and how it defines our lives. Picador, 2014.

A conscious decision was made in Western societies to encourage greed, so as to create the accumulation of wealth. For instance, Keynes said that:

I see us free, therefore, to return to some of the most sure and certain principles of religion and traditional virtue – that avarice is a vice, that the exaction of usury is a misdemeanour, and the love of money is detestable, that those walk most truly in the paths of virtue and sane wisdom who take least thought for the morrow. We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin.

But beware! The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to every one that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight.

Keynes believed that sufficient would remove the problem of economic necessity, and lead to economic bliss. However, both empirical evidence and Islamic teachings show that this is not true. Surveys of millionaires show that they do not feel they have sufficient money for economic security. The Easterlin paradox shows that massive amounts of growth has not led to increased happiness. The reasons are simple. As wants are fulfilled, more are generated, since people seek to improve upon the average level of consumption. As stated in Islamic teachings, if you give a man a valley of gold, he will desire another one. Nothing will fill his stomach except the dust of the grave.

Once the psychological nature of scarcity is understood, the remedies for the problem take a radically different shape from those currently being pursued all over the globe. The following measures to handle scarcity are all in harmony with Islamic teachings and would form the basis of an ET90% designed to oppose ET1%

  1. Encourage Abundance thinking. For example, the Quran says that the Lord has provided bountifully for all.
  2. Prohibit envy, and prohibit conspicuous consumption — both of these steps are contained in Islamic teachings.
  3. Prevent excessive consumption (called israf and tabzeer in Islamic teachings), and encourage simple standards of living. This will prevent the rat-race for ever increasing living standrads, wihch causes harm to all.
  4. Encourage gratitude for the blessings we enjoy, and the feeling of contentment. Encourage generosity, which creates the feeling of abundance.
  5. Encourage social responsibility for each other, fostering cooperation and community, which creates social networks which are the source of comfort and support, creating psychological security.

For a more detailed discussion of Scarcity from an Islamic perspective see Scarcity: East and West Journal of Islamic Economics, Banking and Finance, Volume 6, Number 1, January-March 2010. p. 87-104. For a secular discussion of how the concept of scarcity appears objective, but conceals within its framework three different questionable normative judgments, see my paper on The Normative Foundations of Scarcity