Preliminary Remarks: “The trouble is not so much that macroeconomists say things that are inconsistent with the facts. The real trouble is that other economists do not care that the macroeconomists do not care about the facts. An indifferent tolerance of obvious error is even more corrosive to science than committed advocacy of error.” From The Trouble with Macroeconomics (Paul Romer)
I do not understand why indifference to error is worse than committed advocacy. Tor an illustration of committed advocacy of error, see postscript below on 70 years of economists’ committment to a fallacious theory. Furthermore, the problem is not confined to macro. Microeconomists are also dogmatically committed to utility maximization, when in fact this hypothesis about consumer behavior is solidly rejected by empirical evidence; see: The Empirical Evidence Against Neoclassical Utility Maximization: A Survey of the Literature
Due to frequent headlines, there is a substantial public awareness of core macroeconomic issues like unemployment, trade agreements, exchange rates, deficit, taxes, interest rates, etc. However, even professionals are often ignorant of the intellectual battles which have shaped modern macroeconomics, since this is not taught in typical PhD programmes in economics. This article attempts to provide the history of ideas which led to the emergence of macroeconomics, since this is an essential background required for informed analysis of these issues.
Lord John Maynard Keynes invented the entire field of macroeconomics in response to the Great Depression in 1929, which could not be understood according to economic theories dominant until then. According to the classical economic theory, forces of supply and demand in the labour market would ensure full employment. Keynes starts his magnum opus, The General Theory of Employment, Interest, and Money, with the observation that the economic theory cannot explain the long, persistent and deep unemployment that was observed following the Great Depression. Keynes set himself the goal of creating a theory which could explain wide fluctuations in levels of employment that he observed. He discovered that creating such a theory involved rejecting deeply held convictions, central to economic theory.
Lecture for Teachers by Dr. Asad Zaman on 24th Jan 2017 at PIDE, Islamabad. This lecture is for teachers; See “The Ways of the Eagles” for a lecture directly addressed to students, to motivate and inspire them, A detailed 3300 word summary of the lecture in English is given below. See also: link to one hour video-taped lecture in URDU.
Lecture for TEACHERS on how to inspire and motivate students
Mesmerized by the spell of Western expertise, we are trapped by the illusion that they are the experts in every field, and the best we can do is to be second-rate followers. In fact, the educational methods in use in the West are extremely bad, and it is possible for us to make dramatic improvements in substance and style of teaching. By increasing the efficiency of our educational methods, we can change the world. Imagine producing world class experts of Nobel Laureate calibre at PIDE!
Can it be done? Can we create world-class experts, despite meagre resources and students with weak background and preparation, in Pakistan? YES: It can be done.
What is needed is INSPIRATIONAL TEACHING. Every student is precious, and has within him/her all the genius of Al-Ghazali, Ibn-ul-Haytham, Ibne Sina, al Farabi, Ibn-e-Khaldun and others. If we can light the fire of the thirst for knowledge in their hearts, they can do the rest – we only need to create motivation and inspiration. So the question of primary importance is: How can we become inspiring teachers?
Since I am addressing teachers here, my first task is to explain what they (the teachers) will gain by improving their teaching? Some of the answers to this very important question are:
I will acquire mastery, expertise and depth of knowledge! I will be able to transmit this knowledge to students.
This knowledge has the potential to change my life, and to change the life of my students. Nothing is more precious than the opportunity given to me in form of time of students eager to learn. Nothing is more deeply satisfying than utilizing this opportunity to transmit the treasure of knowledge, the most valuable gift in the collective heritage of mankind.
Major revolutions can be created by everyone doing the little bit that they can. This was the driving idea behind the article below, written for the Pakistani context. It was published in the Express Tribune on March 16th, 2017
The right nutrition between pregnancy and the second birthday has a dramatic effect on a child’s ability to grow, learn and thrive. Failure to provide adequately for the baby’s needs during this critical window can never be compensated for later. With one of the largest population of young people in the world, Pakistan faces a unique challenge. How can we ensure that all babies conceived and born in Pakistan receive the best care that we as a nation can provide? Our future literally depends on how well we can meet this challenge. At a rough guess, about 10 million children in Pakistan would lie in this critical target range. The challenge of providing adequately for all of them is too large for any organisation, including the government to meet. It would be entirely correct to call this situation a silent mega crisis, a problem bigger than the earthquakes and floods which received far more publicity and attention. Meeting the challenge requires all of us to work together on an out-of-the-box campaign, which could provide all the children of Pakistan with a brighter future. If approximately 100 million adults work together for a common goal, we can easily solve the problem which would be impossibly difficult to tackle by any other method.
The first step in this campaign is to take responsibility. We must not ask what other people or organisations are doing to address this crisis. We must ask ourselves what I can do to solve a tiny part of the problem that is within my reach. Ownership and responsibility have magical powers to create solutions. When it comes to my own children, I do everything in my power to ensure that they receive the best possible care. We must take collective ownership of all the children in Pakistan, and strive hard to do everything in our power to serve the needs of those children that fall within our circle of capabilities. The goal of our campaign is to create a million drivers of change — every driver takes creative responsibility for thinking about, and executing, what he or she, or the institution within which they work, can do about the mega crisis that faces our children. The possibilities are endless, and no one person can even conceive of all the projects that could be undertaken by one million drivers of change. Nonetheless, for the sake of illustration, let me list a few major areas which require attention.
Starting from the beginning, we need to take better nutritional care of pregnant women. Doctors and hospitals could design awareness campaigns about their dietary requirements, including micronutrients. The media could play their role by creating shows and news items which highlight the importance of providing the right kind of nutrition to pregnant and lactating women. Different institutions, like shops, restaurants, small scale business enterprises could offer to provide resources to women and children in their neighborhoods, according to their capabilities. Food manufactures should introduce special lines of nutritious foods, to provide delicious and healthy alternatives to junk food. Larger organisations like universities, big business, NGOs, etc., should participate on a grander scale. They should provide thought leadership in design and execution of appropriate strategies, as well as providing research input on the effectiveness on different types of interventions. If every individual and institution can take responsibility for changing a few lives, this would create the desired mega-response required to solve the mega crisis. But the key to this campaign is that we should not wait for someone to tell us what needs to be done. Just as we take responsibility for our own children, making plans without expecting other to help us in bringing them up, so we need to take ownership of all children that we can reach. As Gandhi said, “Be the change that you wish to see in the world.” We need to change our mindsets from being a spectator of events taking place in Pakistan to a game player and a game changer, who creates the events that others talk about.
The government should play the role of enabler and facilitator, cutting through bureaucratic red tape for the sake of our children. The First Thousand Days campaign must rise above political, racial, ethnic geographic, linguistic, religious and sectarian divides. There are many government programmes already in existence which deal with issues related to mothers and infants. Inefficiencies in these programmes exist because dying, malnourished and stunted babies do not figure prominently on our priority list of problems to be solved. Political obstacles could be removed if all relevant parties agreed to put our children first, ahead of all other concerns. Anxieties of Malthusians concerned about population growth should be relieved by research which shows that the poor have excessive children as old-age life insurance. When health and prospects for children improve, the birthrate goes down.
Babies come into the world as a bundle of joy, trusting and trustworthy, full of love for all, and with the capability to spread sunshine and happiness. If this campaign achieves nothing more than increasing our own personal interactions with the children of Pakistan, this will contribute tremendously to our own personal happiness in our daily lives. Just the memory of a baby’s smile full of love and trust is enough to bring warmth and happiness into our lives, and refresh our confidence in the future. To solve the great problems of the world — wars, terrorism, greed, violence, intolerance, hatred, etc., — we need to learn the qualities of innocent babies. As the Bible states, “Truly I tell you, unless you change and become like little children, you will never enter the kingdom of heaven.” Ancient wisdom, which we have neglected or forgotten, tells us that if we take good care of our children, they will take good care of us. Let us pledge ourselves to take better care of our children in Pakistan, and to personally ensure that at least a few children receive adequate nutrition through our own efforts. Amazingly, children thrive on love, developing stronger immunity, and better cognitive skills. Perhaps we don’t have enough material resources for all, but surely we can provide enough love to make our children feel that they are most beloved people on the planet.
This article was written ten years ago — if I was writing it now I would update it substantially. The main point it makes is that the European Enlightenment – the idea that reason and facts can be used to provide better solutions to human problems — has failed disastrously. The reason for this failure, still not realized by European intellectuals, is that the heart and soul of human beings has been taken out of the picture. Using only reason, the argument that efficiently exterminating the Jews by burning them in ovens cannot be refuted; see Modernity and the Holocaust by Zygmunt Bauman. It is the heart and soul which strenuously rejects this, without the need to examine reasoning. How Spirituality matters for development has been covered in an earlier post – Spirituality and Development. Instead of updating the article, I am adding a few notes and links…
After the 1920s, the theoretical and methodological approach to economics deeply changed. Based on a criticism of Marshall’s work and legacy, a new generation of American and European economists developed Walras’ and Pareto’s mathematical economics. As a result of this trend, the Econometric Society was founded in 1930.
The constitutional assembly was held in Cleveland, Ohio, during the annual joint meeting of the American Economic Association and the American Statistical Association. The Norwegian economist Ragnar Frisch played an important role in the Econometric Society that was founded to enhance studies based on the theoretical-quantitative and the empirical-quantitative approach to economic problems. In this way, the founding fathers believed that economic thinking could be as rigorous as the one that dominates the natural sciences.
At the 5th European Meeting of the Econometric Society, in 1935, Jan Tinbergen presented a paper on ‘A mathematical theory of business cycle policy’ that followed the Econometric Society’s guidelines. His causal explanation of the business cycle began with a priori economic-theoretical considerations about explanatory variables and then he proceeded to test a model.
In the late 1930s, John Maynard Keynes and other economists objected to this recent “mathematizing” approach. Keynes, as editor of the Economic Journal, wrote a negative review of Tinbergen’s 1939 book A Method and its Application to Investment Activity. This book presented an statistical testing of business cycle theories based on the application of the method of multiple regression and mathematical framing in the form of a specified model. At the core of Keynes’ concern lied the question of methodology. Recalling his own words:
Am I right in thinking that the method of multiple correlation analysis essentially depends on the economist having furnished, not merely a list of the significant causes, which is correct so far as it goes, but a complete list? For example, suppose three factors are taken into account, it is not enough that these should be in fact veræ causæ; there must be no other significant factor. If there is a further factor, not taken account of, then the method is not able to discover the relative quantitative importance of the first three. If so, this means that the method is only applicable where the economist is able to provide beforehand a correct and indubitably complete analysis of the significant factors. The method is one neither of discovery nor of criticism. It is a means of giving quantitative precision to what, in qualitative terms, we know already as the result of a complete theoretical analysis. (Keynes 1939: 560)
In this paragraph, it is clear that Keynes doubted the use of inductive methods of generalization and statistiicial inference to build economic theories because of the peculiarity of the economic systems characterized by:
a low degree of homogeneity,
a high degree of complexity
the lack of stability through time.
Indeed, on behalf of the peculiarities of the economic systems, Keynes highlighted that econometrics turns out to be a method not of testing or of discovery, but of measurement of selected variables.
refeences
Keynes, J. M., Professor Tinbergen’s Method, The Economic Journal, Vol. 49, No. 195 (Sep., 1939), pp. 558-577. Published by: Blackwell Publishing for the Royal Economic Society. Stable URL: http://www.jstor.org/stable/2224838
Tinbergen, J. A Method and its Application to Investment Activity. Geneva: League of Nations, 1939.
Published on 22 Jan 2018 in Newsline Magazine as “Cradle of A New Economics“. Based on reader feedback, I feel the need to add a warning that this particular piece is addressed to a Muslim audience, and may offend secular humanists and others, since it offers views strongly opposed to deeply held beliefs Only those with genuine commitment to pluralism, with the ability to lay aside personal beliefs, in order to understand alternative, radically different, points-of-view, are encouraged to read it, or to view the lecture.
This is a 1600 word summary of The Presidential Address at the 33rd Annual Conference of PSDE, on 12 Dec 2017 in Islamabad. Also, full 35m Video Lecture:
Failure of Economics: After the Global Financial Crisis (GFC) of 2007, the failure of economic theory to provide a warning, explanation, or solution, was noted far and wide. Prominent economists – heads of institutions responsible for policy, such as the World Bank, International Monetary Fund, Federal Reserve Bank, Bank of England and others – said that theories currently forming the basis for policy had failed completely. The Queen of England went to the London School of Economics to ask “Why did no one see it coming?”
Resistance to Change: Despite a widespread realisation of this failure, the mainstream response within the economics profession has been characterised by a stubborn resistance to change, and an obstinate defence of inaccurate theories. Models in use at central banks across the globe have been producing flawed forecasts since the GFC. Daniel Tarullo, ex-governor of the Federal Reserve Bank, wrote a paper titled ‘Monetary Policy Without a Working Theory of Inflation,’ in which he pointed out that even though experience had proven all current economic theories about inflation to be incorrect, economists stubbornly stick to them as a basis for making policy. Similarly, even though theories used to assess risk in stock markets failed disastrously in the GFC, these continue to be used to this day.
Paradigm Shift Required: The problem arises because the changes required are not minor patches or modifications in existing frameworks. A revolutionary paradigm shift is needed. When Max Planck could not persuade his contemporaries in physics to accept quantum mechanics, he realised that “Science progresses one funeral at a time.” It is not possible to convert the elders of the profession, who have invested their lives in learning incorrect theories. One must catch the youth, and train them in new ways of thinking, to create an economics that will be viable in the 21st Century.
A Heavy Responsibility: This situation represents both a golden opportunity and a heavy responsibility for us in the Islamic world. For reasons to be explained further below, the chances of the required revolution taking place in the West are negligible. Unlike the West, our investment in modern economic theory is small. Furthermore, modern economic theory is designed to enrich the wealthy while counselling the poor to wait for the ‘trickle down.’ Thus, launching a revolution is aligned with the economic interests of the poor countries. The greatest resistance to change would come from those with a professional training in economics. We need to co-opt our PhD economists by asking them to work for the interests of the poor, instead of the wealthy, and to sacrifice personal privilege for justice and social equity .
Three Mistakes: So how can we launch a revolution in economics? Doing so requires noting and correcting three major mistakes made over the course of intellectual progress in the West. Since these major flaws in the structure of Western knowledge have persisted for centuries, and form the foundations of Western thought in social science, they cannot easily be corrected there. That is why it is up to us, in the Islamic world, to launch the revolution that may save humanity from the looming catastrophe that threatens us all due to misguided Eurocentric theories of economics, politics, and society. The three mistakes are:
The Battle of Science and Religion – from the 16th to the 18th centuries in Europe – which led to an exaggerated respect for science as the sole source of valid knowledge, and a rejection of religion as nothing but superstition.
The Battle of Methodologies – in the late 19th Century – which replaced the historical and qualitative approach to economics by a quantitative and scientific approach.
A drastically mistaken understanding of the nature of science, known as logical positivism, became dominant in early 20th century. Social sciences were re-formulated to align with this philosophy, which stressed the importance of observables, and advocated benign neglect of unobservables. Even though this philosophy was later proven wrong, foundations of modern economics have not been revised, and continue to be based on principles of logical positivist philosophy.
Battle of Science and Religion: Eurocentric histories suggest that science sprang up full-blown in Europe, like Athena emerging from the forehead of Zeus. Even careful thinkers like Max Weber were deceived into thinking that scientific thought is unique to Europe. In fact, completion of the re-conquest of Islamic Spain in 1492 gave Europeans access to vast libraries with millions of books containing knowledge gathered from around the globe. The battle of science and religion is just another name for the European struggle from the 16th to 18thcenturies, to assimilate this flood of new knowledge, which was often radically in conflict with the teachings of the Catholic Church. The Church’s mechanisms of massive censorship, and the Inquisition for heretical thoughts, eventually failed to stem the tidal influx, resulting not only in the fracture of the Church, but also in a bitter enmity between progressive thought and religion in Europe (which lasts to this day).
The Resulting Damage: The victory of science over religion in Europe has had adverse effects on the development of social science in many ways. Devaluing religion led to a loss of understanding of the spiritual and emotional aspects of man. European philosophers and social scientists created models of men as being brains suspended in vats, with no heart and no soul. While a strong sense of morality is built into our nature, discarding the heart and soul from scientific consideration led to a loss of the understanding of the nature of morality. As Julie Reuben has described in The Making of the Modern University: Intellectual Transformation and the Marginalization of Morality, changing conception of the nature of scientific knowledge led to the exclusion of morality and character-building from the syllabus and goals of a university education in the West. Since morality cannot be given an empirical foundation, it was abandoned as a meaningless concept within a scientific framework for the construction of knowledge. This has resulted in an economic theory which has become blind to concerns for justice, equity, poverty, exploitation and similar issues, which were central to economics in an earlier era (when it was a branch of moral philosophy).
The Battle of Methodologies: In the late 19th century, the natural methodology for economics, which is historical and qualitative, lost the battle to the newly developed scientific and quantitative methodology. While the scientific method is well suited to the study of inanimate objects subject to laws, its application to human beings and societies led to a loss of understanding of the nature of both. Modern economics treats human behaviour as robotic, subject to mathematical laws. Studies of actual human behaviour show dramatic differences from the homo economicus, which is basis of the scientific formulae of economic theories. It is these differences which create the ‘irrational exuberance’ that leads to financial crises, which cannot be predicted by economists with their impoverished models of human behaviour. Economic theory ignores, to its great loss, social aspects of human behaviours, which are central to human welfare. The desire to be scientific also leads economists to ignore particular historical events like the two world wars, since these are one-time events which cannot be subjected to universal scientific laws. But this means that economists do not study the historical context within which economic systems operate, leading to a dramatic loss of understanding.
Logical Positivismrepresents a sophisticated and complex misunderstanding of science, which rose to prominence in the early 20th century, and had a spectacular crash later on, as philosophers became aware of its defects. The main idea of this philosophy is the scientific theories should only be concerned with observables and should ignore, or eliminate, unobservables. Under the influence of positivism, behavioural psychology ignored the deeper and unobservable structures of human thoughts and emotions, and instead focused on observable behaviours, stimuli and responses. A similarly shallow analysis led economists to posit human behaviour as being driven solely by the purpose of maximisation of lifetime consumption. Focus on observables and quantifiables has led to a single-minded concentration on wealth as the sole goal of economic endeavour. It is only with the re-discovery of multi-dimensional nature of our lives that the deep defects in this measure, and the damage it is causing, are gradually becoming visible. The most important aspects of our lives are based on unobservables and un-quantifiables.
Concluding Remarks: The spectacular technological progress of the West has dazzled our eyes, making it difficult to see any defects in their structures of knowledge. But learning how to split atoms and build bombs and spaceships does not lead to insight into the secrets of the human heart. Massive gains in material wealth have been accompanied by increasing social misery everywhere. We can all see the breakdown of communities, families, increasing inequalities and injustice, environmental collapse, and senseless wars leading to millions of deaths, with billions living below the poverty line. At the root of the failure to solve our social problems is a hopelessly defective Western social science which denies the existence of the heart and soul. Hope for the future of humanity lies in a radical re-construction of the social sciences, which re-integrates the heart and soul, as the starting point for the study of human beings and societies.
Pride resulting from global dominance and spectacular scientific and technological developments led Europeans to believe that the West was the most advanced and developed of all societies. Other societies were primitive and under-developed. As these other societies matured and grew, they would follow the same stages that were followed by the West, and eventually become like modern Western societies. Early thinkers like Comte described the stages in growth from primitive society to modern ones in a ‘logical’ sequence. The enterprise of colonizing the non-European world was painted in bright terms as being part of the “White Man’s burden” of bringing enlightenment, good government, science, technology and other benefits of Western civilization to the rest of the world. Until the 60’s modernization theorists, like Parsons and Rostow echoed these sentiments, regarding Westernization as a desirable and inevitable process for the rest of the world. The goal of this article is to discuss some of the difficulties which led to substantial reconsideration of these naïve views. Current views (for example, Development as Freedom by Amartya Sen) are much more complex and diverse, and generally more respectful of other ancient civilizations in the world.
The first problem with the modernization theories is the deeply racist worldview embedded in them. The Dred-Scott decision in the USA declared that blacks were “beings of an inferior order, and altogether unfit to associate with the white race, either in social or political relations, and so far inferior that they had no rights which the white man was bound to respect.” Australian aborigines were hunted like animals by the British. Lord Cecil Rhodes declared that “I contend that we are the finest race in the world and that the more of the world we inhabit the better it is for the human race. Just fancy those parts that are at present inhabited by the most despicable specimens of human beings; what an alteration there would be if they were brought under Anglo-Saxon influence … ” He became the richest man in the world at the time by fully exploiting those ‘despicable specimens of human beings’ in the British colonies. Explicit and open racism had largely been abandoned, but is regaining strength and popularity. Additionally, it has morphed into less open but equally poisonous forms known as ‘modern racism’ or ‘symbolic racism’.
A second problem with modernization theories is that it has become abundantly clear that high sounding moral ideas have served as a cover for very low and despicable purposes. In King Leopold’s Ghost, Adam Hochschild documents the extremely cruel, oppressive and exploitative treatment meted out to Africans which resulted in the death of 4 to 8 million in the Belgian Congo alone. In the name of bringing them the benefits of European civilization, King Leopold’s officials used extremely harsh methods to force the locals to collect rubber. To teach the locals Western work ethics, the Belgians took wives and children hostage and kept them in subhuman conditions until their African husbands fulfilled their quotas. Soldiers would torture, chop off hands, or kill the inhabitants if they faltered in their work. All of these policies were promoted and advertised as Christian charity for the benefit of the natives. Similar policies are also currently in operation. According to testimony of high-placed officials like Paul O’Neill, Alan Greenspan, and Henry Kissinger, the Iraq war was planned for the control of the vast oil resources of Iraq. However, the White House vehemently denies this view, and alleges high motives like the desire to bring democracy to Iraq. While every US soldier killed is counted, no one counts the millions of inferior lives destroyed by the Iraq war. The vast amount of torture, arbitrary killings of civilians, destruction of Iraqi infrastructure and entire cities, and the resulting miseries of the populace, has surfaced in alternative media, but only occasionally breaks through to the mainstream media in USA.
A third problem with modernization theories is that they have failed to deliver results. All across the world, “structural adjustment programs” (SAPs) were designed and implemented by expert economists to help improve economic performance. Even proponents from IMF and World Bank now widely acknowledge that these policies have been failures. Critics, including Nobel Laureate Stiglitz, claim that these SAP’s are a major cause of poverty all over the world. Under General Pinochet, the Chilean economy was turned into a laboratory experiment in free market economics by the “Chicago boys.” Advice from Nobel prize winning economist Milton Friedman followed strictly for several years resulted only in lackluster growth and continued high unemployment. Faith in the miracles of the free market led only to disappointment and failure when “shock treatment” was applied to the Russian economy. Pressure by US economists for financial liberalization led directly to the East Asian crisis. Throughout the world, numerous vigorously pursued programs for modernization and development along Western models have only led to chaos, cultural conflicts, and confusion.
The idea that Western models are perfect in all areas, including social, cultural and economic, leads to the dominant role of foreign expert advisors in development. These experts need to know nothing about local conditions, customs, traditions, because all of these are just obstacles in the path to progress. They come to a country knowing the solutions in advance, and give advice on how to move from existing patterns to Western ones in the shortest possible time. The havoc wrecked by this disregard and ignorance of local issues has been very well documented by Mitchell in The Rule of Experts. Studies of successful models for development (post-war Germany, Japan, communist Russia, East Asian Tigers) show that the strategies used there were often in oppositions to those recommended by conventional economics. World Bank economists writing about The East Asian Miracle admit that in most of these economies, the government intervened systematically, through multiple channels, to foster development. Despite these systematic violations of neoclassical prescriptions for development, these countries achieved the highest rates of productivity growth and fastest development seen at that time in the historical record.
Lessons from studies of successful development strategies are abundantly clear. Each such country has developed by disregarding foreign advice, and developing their own strategies. Self reliance, self confidence, trust, cooperation and methods adapted to local conditions and culture have been crucial to success. Slavish imitation of Western models and an inferiority complex are the biggest obstacles to progress. Cultural conflicts due to modernization, created by one segment of society opting for Western ways and another holding to traditions, have prevented the social harmony and unity necessary for progress.
