A Realist Approach to Econometrics

The talk linked below explains why the positivist/nominalist methodology used in Econometrics leads to mostly nonesense regressions. It also explains how a realist alternative can be developed.

“The Philosophy and Techniques for Quantitative Research” – Keynote Address by Dr. Asad Zaman, VC PIDE at Workshop on 19-20 April, 2018 Dept of Economics, Fatima Jinnah Women’s University, Rawalpindi, Pakistan.

My message will come as a surprise to students gathered here to learn advanced econometric techniques. Let me begin by stating it baldly: “Econometrics is nothing more than Fraud by Numbers”.

As Joan Robinson famously said, “The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.” A similar statement holds for econometrics. We should learn it not in order to acquire techniques which will teach us how to use data sets to make inferences about reality. Rather, we should learn it to avoid being deceived by econometricians. The techniques described by Perkins in “Confessions of an Economic Hit-Man” are in common use around the world. Fancy econometrics is used to persuade people to adopt policies which harm the public, while fattening corporate coffers.

As a simple illustration of econometric fraud, consider the following regression:

CONS    =              -268.7    +  6.78 SUR – 1.82 CO2 +  error    (R2=0.84)

Std Err:                  (25.9)       (0.73)         (0.65)           (20.0)

Where CONS = Private Consumption Expenditure in Pakistan, SUR =Survival to age 65, female (% of cohort) = SP.DYN.TO65.FE.ZS, C02 =CO2 emissions from gaseous fuel consumption (% of total)= EN.ATM.CO2E.GF.ZS – these are variables taken from the WDI data set.

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The Pareto Efficiency Swindle

This continues a sequence of posts explaining how conventional economics is actually the economic theory of the top 1%: ET1%: Blindfolds created by Economic Theories. Eight central concepts of economic theory are shown to be deceptive – they have an appearance of objectivity, fairness, and equity, but actually conceal a strong bias in the favor of the wealthy. The previous post was the “Illusion of Scarcity.”

We call the concept of “Pareto Efficiency” a swindle because it encapsulates a normative principle that property rights of the wealthy take precedence over the right to basic needs of the poor. However, it is disguised to have an appearance of scientific objectivity, while the opposite normative preference, which most people have, is said to depend on subjective and unreliable value judgments.

The principle of Pareto efficiency has a harmless and innocuous appearance. Who could object to the idea that if we give more material goods to everyone, then the society as a whole would be better off? However, we will show that Pareto Efficiency is deceptive and fully qualifies for the label ET1%. It appeals to everyone when we say that increasing social welfare requires giving more goods to all. But the hidden consequence of accepting this principle is that you cannot take wealth away from the super-rich to give to the hungry, because that would decrease the wealth of the super-rich. It also provides moral cover for increasing inequality, as we shall see. It also protects property rights against the taxation required to fulfill social needs of the poor.

Dialogos: Economics Education and Pedagogy. An Interview with Peter Söderbaum

 

Malgorzata Dereniowska: Welcome to “Dialogos: Economics Education and Pedagogy,” Peter! In this interview we will focus on the questions of institutional change in economics education system, economic pedagogy and social responsibility of universities.

Could you tell me something about your background and your professional experience as a teacher of economics?

Peter Söderbaum: As a student at Uppsala University I became interested in political science, economics and business management (or business economics). My first teaching experiences were at Uppsala University and the department of economics (course in international economics) but I later moved to the department of business management where I was teaching marketing courses and also took my PhD on Positional Analysis. Later I moved back to economics now at the Swedish University of Agricultural Sciences, Uppsala, to become associate professor and lecturer in environmental and natural resource economics. 1995-2005 I was responsible for ecological economics Bachelor and Master programs at Mälardalen University in Västerås.

At an early stage Uppsala University organized an interdisciplinary course in environmental science and I became the person responsible for the environmental economics part of the course. I am referring to the 1970s and this was a time when the borders between disciplines became less respected and interdisciplinary work and courses increasingly encouraged. If I as a lecturer in marketing can learn something about consumer behavior from social psychology – why should I refrain from such learning opportunities?

Malgorzata: How did you come to appreciate pluralism and diversity in economics teaching?

Peter: It seems to me that leading actors in university departments of economics tend to think in Kuhnian ‘paradigm-shift’ terms. Either the neoclassical paradigm is correct or some other paradigm will be proven superior. If there is no other economics paradigm based on the same or similar positivistic premises then we have to accept the present monopoly position of neoclassical theory. There is not yet any alternative according to this view.

But just as there exist different disciplines that can be both complementary and competitive in relation to a particular set of phenomena (such as consumer behavior), it becomes meaningful to refer to co-existing paradigms in economics, each one having its strengths and weaknesses. ‘Paradigm coexistence’ then becomes a key concept. There may still be shift in ‘dominant paradigm’ but advocates of different paradigms should continue to respect each other and the paradigm losing its dominant position may still have something to contribute.

At the mentioned agricultural university there was a period in the early 1990s when students had a choice between neoclassical environmental economics and institutional version referred to as ‘ecological economics’. This idea of separate courses and separate supervisors in thesis projects became a success at least as I saw it. (I am inclined to say that it became too successful for the neoclassical department leadership to accept.)

The big issue here is about values and ideology. Neoclassical economists tend to assume that ‘value-neutrality’ is possible while I as an institutional economist argue with Gunnar Myrdal (1978) that “values are always with us”. Neoclassical theory is science but at the same time values and ideology and the same holds for institutional theory of a particular kind. In a democratic society we need to refer to more than one economic theory to match reasonably well the different ideological orientations in a particular community. In ideological terms, neoclassical theory is close to neoliberalism, I.e. extreme beliefs in markets, monetary profits in business and economic growth in GDP-terms. Today we are instead expected to relate to 17 UN sustainable development goals (SDGs) where economic growth plays a more modest role and other dimensions are emphasized.

Malgorzata: Why do you think pluralism is important from a pedagogical point of view?

Peter:As already indicated I believe that there is often a complementary relationship between two conceptual frameworks and paradigms where one paradigm can add to the understanding offered by another. Pluralism also adds to the freedom of choice for the scholar scientifically and ideologically.

I also feel that comparing one conceptual and theoretical framework with another is an excellent way of learning or doing research. If you want to understand neoclassical theory you may need to compare it with some other theory or perspective.

Malgorzata: In your work you repeatedly emphasize the importance of democracy as both a subject and method in economics research and teaching. You point to the fact that in economic textbooks the term democracy can be searched in vein. How do you see the connection between democracy and economics?

Economics is ideology as I have argued and limiting education to one single paradigm such as neoclassical theory at university departments of economics means that such departments become centers of political propaganda for the ideology built into neoclassical theory. Neoclassical Cost-Benefit Analysis (CBA), an analysis focusing on the monetary dimension, is an extreme case of how economists as experts dictate correct market values for purposes of decision-making at the level of society. Methods that are more open in ideological terms are very much needed.

In my recent writings I am even arguing that economics as a discipline needs to be redefined as “multidimensional management of resources in a democratic society”. One-dimensional monetary analysis of resources does not go well with the multidimensional complexities of the real world and we need to take ideological options seriously if we want to deal with present unsustainable development.

Malgorzata: Why does democracy matter in economics curriculum and pedagogy? 

Peter: As I said, present development is unsustainable in many ways. As many other ecological economists I believe that the monopoly of neoclassical theory has a role in this fact. In attempts to deal with climate change, biodiversity loss, environmental pollution and inequality for that matter, we cannot limit debate to one scientific and ideological perspective.

Students need to face courses and textbooks in the history of economic thought and they should learn about essentials of some versions of heterodox economics. Dialogue between professors who differ in their scientific and ideological preferences should be encouraged rather than avoided.

Malgorzata: Why, in your opinion, there is so much reluctance to open up the issues of democracy and democratization of economics within the discipline?

Peter: I can of course only speculate about this. I think professors of economics and many of their students like to see themselves as experts in an extreme sense. Admitting that there are competing conceptual frameworks and theories may imply uncertainty and confusion for students while protecting neoclassical theory is expected to strengthen the profession.

Actually, neoclassical public choice theory may have something to offer by understanding professors of economics as a relatively homogeneous rent-seeking category. If they cooperate, they can become successful in terms of salaries and otherwise. Fortunately, there is some remaining heterogeneity among neoclassical economists that in the future may open the door for tolerance and democracy.

Malgorzata: Do you think that something can be done about this situation now, given the current institutional settings and existing power relationships between the actors at the higher education institutions?

Peter: What can be done now? We should of course not exclude the possibility that an increasing number of neoclassical economists become more open-minded. I believe however that this tendency to hide behind positivism, mathematical modelling etc. has to be dealt with also at the university level and the political level more generally. The leadership of universities need to understand that there is no value-free economics and that from that follows that reliance on one single paradigm is a mistake. The existence of more schools of thought than one in economics is a fact of life and this has to be reflected in curriculum and pedagogy.

Something is “already” happening at the level of students in economics with their calls for change and networks. We are now waiting for response to these calls from university administrations, ministries of education and other concerned actors. We should encourage politicians and political parties to act. The idea that universities and professors are ideologically neutral persons has to be abandoned. Good science has to become compatible with democracy in addition to other qualitative indicators.

Malgorzata: How would you diagnose the current state of economics education, and how do you perceive the role of pedagogy in this system?

Peter: When looking for a more pluralist economics I think that it is more meaningful to focus on developments outside economics departments. While many actors in the latter departments are rather narrow-minded something happens at university departments of economic history, department of management science and departments of political science. Students have after all some chances to choose disciplines with interdisciplinary openings.

Another possibility is to continue debate about the “Bank of Sweden prize in economic sciences in memory of Alfred Nobel”. This prize was perhaps less of a problem in its early stages but tends now to be part of the protection of neoclassical theory and a neoliberal ideology. Today we need to ask questions about the present global and national institutional framework but neoclassical theory only contributes to a protection of the status quo.

Malgorzata: In your work on sustainable development, you raise the need for wide-range institutional change processes. These institutional changes are meant to counteract the current unsustainable trends that endanger the future possibility for economic growth and human development. Another target of sustainability transformation pertains to the current lack of accountability of individual and collective actors. Since education plays a role in these processes, how do you envision the needed institutional change in economics education?

Peter: In neoclassical theory consumers and firms are understood as mechanistic entities. Instead we need to look upon individuals and organizations as actors guided by an ideological orientation or mission and with responsibilities in a democratic society. Institutional change can be a result of social movements and initiatives by individuals as actors.

There are (unfortunately) many candidates for institutional change if we want to move away from one-dimensional monetary thinking in business or if we want to see global trade relations in new light. Joint stock companies and WTO are thus institutions that deserve consideration. Even UN institutions such as UNEP and UNEP are heavily influenced by and limited to mainstream neoclassical theory. Behind a reluctance to discuss institutional change is of course present power positions and relationships where business interests play a role.

Malgorzata: You tend to emphasize the manifold role of economics professors: as researchers, as teachers, and as citizens, viewing them as agents who exercise, to various degrees, social responsibility in their various roles. This outlook promotes a certain philosophy of education and pedagogy. For example, you seem to be distanced from the view of economics as a purely objective science, and a resulting image of economics teaching as a process that produces experts-analysts, leaving aside the considerations about their role in society and the social consequences of their work. How would you define the basic tenets of your philosophy of teaching? In your view, what is the role of economics teachers, and how do you see the potential of economics students?

Peter: Here we are back to the ideas of positivism and the tendency to hide behind ideas of value-neutrality. Instead we need engaged professors that are capable of extending their views beyond self-interest. Conceptual frameworks and theories should be seen in the light of their ideological implications and each narrative should be contested rather than protected. Incentive systems for professors and students should facilitate an open debate about our common future.

Malgorzata: You promote the idea of University Social Responsibility. Can you tell something more about it?

Peter: Yes, I have suggested that just as some business actors refer to Corporate Social Responsibility (CSR) we need a similar debate about University Social Responsibility (USR). Some would say that this is a non-issue. Actors within universities are always doing the right thing, searching the truth about various phenomena. My experience of many years of teaching and doing research in ecological or sustainability economics suggest that research and education is not only influenced by a desire to deal with contemporary problems in society but also with the protection of self-interests and personal career opportunities.

Thank you!

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Our guest, Peter Söderbaum, is a professor emeritus in ecological economics at Mälardalen University, Västerås, Sweden. His books include Ecological Economics. A political economics approach to environment and development (Earthscan, 2000), Understanding Sustainability Economics. Towards pluralism in economics (Earthscan, 2008), Economics, ideological orientation and democracy for sustainable development (World Economics Association Books, 2016), and Positional Analysis for Sustainable Development. Reconsidering Policy, Economics and Accounting (2017) co-authored with Judy Brown and Małgorzata Dereniowska. He has written numerous chapters in other books and articles and is member of the editorial advisory board of Ecological Economics and International Journal of Pluralism and Economics Education.

Introducing a New Economics

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/

Achieving High Growth

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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The Illusion of Scarcity

(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“

 

ET1%:Blindfolds Created by Economics

In my paper on “The Empirical Evidence Against Neoclassical Utility Theory: A Survey of the Literature”, I have argued that economic theories act as a blindfold, preventing economists from seeing basic facts about human behavior, obvious to all others. For instance, economists consider cooperation, generosity, integrity (commitments), and socially responsible behavior, as anomalies requiring explanation, while all others consider these as natural aspects of human behavior.

Far deeper insight into the blindfolds created by economic theory is obtained when we realize that these are not random mistakes, made due to defective reasoning or neglect of empirical evidence. If the shopkeeper systematically makes mistakes which always increase the total bill, we can conclude that the mistakes are purposeful. Similarly, strong and repeated commitment of exactly the same mistakes, flying in face of all empirical evidence, reveals the deep ideological commitments which create these systematic errors.  In particular, the goal of this note is to show that modern economics is not what it claims and pretends to be: an objective, factual and scientific description of the laws governing capitalist economies. Instead, it is actually a branch of moral philosophy, and provides a justification for the inequality and injustice built into the system, by “showing” that these are necessary for the functioning of the system, and the system itself is fair for all participants, and leads to the best possible outcomes.

Contrary to the Shakespearean claim that names do not matter, research shows that desert-dwellers recognize different types of sand using more than seventeen different names, while those who do not have these names in their language also cannot recognize these differences. To highlight the difference, and help recognize it, we will label conventional economics as ET1% — the Economic Theory of the top 1%. In contrast, Islamic Economics champions the cause of the poor, and can be called as ET90% — the economic theory of the bottom 90%. Below, we will illustrate how these two theories are diametrically opposed to each other in the context of eight core concepts of modern economics. We do not claim that this list of deceptions is complete – there are many more ideas which are misleading. However, an understanding of how these eight concepts, listed below, are used to deceive the public will provide sufficient evidence for our central thesis that economic theory should be recognized for what it is: ET1%.

1. Scarcity
2. Pareto Efficiency
3. The Invisible Hand
4. The Production Function
5. GNP per Capita
6. Separation of Economics from Politics/Power
7. Private Property
8. Utility Maximization

I will explain, in separate posts, how each of these is a deceptive concept. But before we discuss specific details of how these concepts deceive the general public, some basic principles must be highlighted. Note that the number “1%” is used metaphorically; the actual number of people who benefit massively from capitalism is far less. According to recent OXFAM statistics, about 60 people own more than half of the total wealth on this planet. In any case, the number of people at the top is too small to enable them to establish favorable political and economic systems by force. Instead, they must rely on persuasion. Their strategy is create theories which become widely accepted by the vast majority, which present the economic system as necessary, just, and efficient. As Karl Marx recognized, capitalism works not by force, but by persuading the laborers of the necessity and fairness of their own exploitation. In this process of persuasion, the middle 9%, including especially the intellectuals and the academia, play a crucial role. The educational institutions train and tame the populace into accepting injustice as a natural part of the system. Those who participate in this process of indoctrination are duly rewarded by being allowed the perks and privileges of managing the entire system on behalf of the elite 1%.

One implication of this is that ET1% must have the appearance of fairness and objectivity – that is the only way it can be persuasive to the bottom 90%. However, hidden beneath this appearance must be the reality that the theory is extremely favorable to the interests of the super-rich. Thus, by definition, ET1% is deceptive. We will show, in separate posts, how each of the eight concepts listed above satisfy these criteria, concealing a strong bias towards the rich hidden within an attractive framework which would appeal to all.  In this first post, we just provide an illustration of this principle to clarify the concept.

Mazdak was an ancient Persian prophet/philosopher who preached against private property, and argued in favor of communal ownership of all resources. This would obviously appeal to the poor, who would thereby acquire a share of ownership in the palaces, wealth, and luxuries of the rich. However, the practical effect of the philosophy was the opposite of this egalitarian dream. The rich and powerful were able to defend their properties, and also were able to occupy and take over the property – including wives and children – of the poor, because they had the power to enforce their will upon others. The philosophy provided a cover for their actions because it deprived the poor of their rights to their own property. This is exactly how ET1% works: by appealing to the poor, while working against their interests.