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

Preface:

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

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

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

happiness

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

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

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

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

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

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

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

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

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

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

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

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

ABSTRACT:

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

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

OUTLINE of Proposed Paper:

Conventional Economics is wrong in all three dimensions.

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

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

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

Islamic Economics Offers a Superior Alternative in All Three Dimensions

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

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

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

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

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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This is the second lecture on Understanding the Rise and Fall of the Gold Standard — shortlink: bit.do/azifa2 — we start with a  Summary of First Lecture 

The first lecture discusses the Keynesian theory that the exact level of money in an economy is critically important – too little leads to recessions, while too much leads to inflations. Furthermore, domestic business cycles, and international financial crises are caused by pro-cyclical behavior of current artificial systems of money creation and international trade. Standard macro theories make it impossible to understand the economy because they assert that money is neutral, and does not affect the real economy – exactly the opposite of the Keynesian idea that the quantity of money is all important. Standard macro model currently in use throughout the world have no explicit role of money, banks, and credit, even though these factors are of central importance in understanding the world. Once we understand the vital role and function of money within an economy, it becomes possible to understand historical events of the twentieth century – whereas this is impossible using conventional macro theories. The first lecture summarizes how the colonial system came into being, and the monetary arrangement for a hard currency at the core and soft currencies in the periphery. This system of fiat currencies works fine within one system of colonies, where the value of money is decreed by sovereign fiat. For trading between different countries, the gold backed currencies were used. As European countries prospered by exploiting resources throughout the globe within their colonies, inter-European trade increased. The optimal quantity of money required for the domestic economy is not the same as that required for stable international exchange rates. The pro-cyclical money creation which is characteristic of the system creates cycles, and large cycles lead to crises on a routine basis. World War I was partly caused by the breakdown of the colonial trading system due to the end of expansion possibilities after the completion of the conquest of the globe. Efforts to restore the gold standard after World War I failed. The second part of the lecture discusses the post World War I history, with reference to the international financial architecture that emerged in the post-Gold era after World War I.

3100 Word Summary of Second Lecture on Global Financial Architecture

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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 previous parts of this article (Understanding Macro I & Understanding Macro II), we have described how strict financial regulation and Keynesian prescriptions for full employment brought prosperity for the masses, but reduced corporate profits. This last part describes the successful counter-attack by corporations which reversed this state of affairs, causing a massive rise in the income shares of the wealthy 1% and a decline in the fortunes of the bottom 90%.

In the mid 70’s, when I was studying for my Ph.D. in Economics from Stanford, Keynesian economics ruled the roost; pre-Keynesian free market economics was confined to the Chicago School, and not considered intellectually respectable. This situation was reversed in the 90’s, when the Chicago School became dominant, while Keynesian economics was no longer considered respectable. The multi-dimensional strategy used to create this revolution on the academic front is described by Alkire and Ritchie inWinning Ideas”, while the global strategy to transform socialistic economies into capitalistic free markets is described by Naomi Klein in The Shock Doctrine: The Rise of Disaster Capitalism. A common thread between the two is the patient preparation of detailed plans, while waiting for a crisis, which provides an opportunity to implement these plans.

The intellectual crisis that Chicago had been waiting for occurred in the early 70’s when the Arab Oil embargo, in retaliation for US support of Israel, led to stagflation in the USA. The simultaneous occurrence of high inflation and high unemployment was said to be in conflict with Keynesian theories, while the Chicago School theory of Milton Friedman was said to provide an explanation for the unexpected phenomena. This became widely accepted, and led to a substantial rise in the prestige of the Chicago School, and a blow to the Keynesians. The 1% capitalized on this by providing funds to Sveriges Riksbank, the Central Bank of Sweden, to create a simulated Nobel Prize for Economics, named the Sveriges Riksbank prize in honor of Alfred Nobel. The Nobel family protests against this appropriation of the prestige of the Nobel Prize were ignored, and the public was fooled into accepting this just like the genuine Nobels. In quick succession, roughly half of all the Nobel prizes were awarded to Chicago economists, interspersed with 50% going to randomly chosen others to create a semblance of neutrality. This led to a rapid rise in the academic prestige of the Chicago school.

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