Economics for the 21st Century

1600w Summary of Presidential Address at 33^rd Annual Conference of Pakistan Society of Development Economics, 12-14 Dec 2017, Marriot, Islamabad. Link to full 35m Video Lecture

published in Newsline NLINE magazine only with title Cradle of a New Economics

Failure of Economics: After the Global Financial Crisis (GFC) of 2007, the failure of economic theory to provide a warning, explanation, or solutions was widely noted by insiders and outsiders. Prominent economists, heads of institutions responsible for policy at major institutions like World Bank, IMF, Federal Reserve Bank, Bank of England and others, said that theories currently in use as basis for policy had completely failed. The Queen of England went to L ondon School of Economics to ask “Why did no one see it coming?”.

Resistance to Change: Despite widespread realization of failure, the mainstream response within the economics profession can be characterized by a stubborn resistance to change, and an obstinate defense of ridiculously wrong theories. Models in use at Central Banks throughout the world have been producing seriously wrong forecasts since the GFC. The ex-Governor of Federal Reserve Bank, Daniel Tarullo, wrote a paper entitled “Monetary Policy Without a Working Theory of Inflation,” which explains that even though all current economic theories about inflation have been proven wrong by experience, economists stubbornly stick to using them as 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 assess risk to this day.

Paradigm Shift Required: Why is there such strong resistance to change, even in face of a pressing need to do so? 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 realized 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 wrong theories. One must catch the youngsters, and train them correctly in new ways of thinking to create an economics which will be viable for the 21^st century.

A Golden Opportunity: This situation represents a golden opportunity 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 very small. Furthermore, modern economic theory is designed to enrich the wealthy while counseling the poor to wait for the “trickle down”. Thus, launching a revolution is aligned with economic interests of the poor countries. The greatest resistance to change would come from those with professional training in economics. We need to co-opt our Ph.D. economists by asking them to work for the interests of the poor, instead of the wealthy, and to renounce false theories in favor of the truth.

Three Major 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 about social science, they cannot easily be corrected in the West. 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 massively mistaken Eurocentric theories of economics, politics, and society. We briefly list the three mistakes, before turning to a detailed discussion of each mistake separately.

1. The Battle of Science and Religion which took place from the 16^th to the 18^th century in Europe led to an exaggerated respect for Science as the sole source of valid knowledge, and a rejection of religion as nothing but superstition.

2. The Battle of Methodologies which took place in the late 19^th Century replaced the historical and qualitative approach to economics by a quantitative and scientific approach.

3. A drastically mistaken understanding of the nature of science, known as logical positivism, became dominant in early 20^th 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 over the 16^th to 18^th century, to assimilate this flood of new knowledge, which was often radically in conflict with the teachings of the Catholic Church. Church 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 extremely adverse effects on the development of social sciences in many ways. We mention two of the central effects. Devaluing religion led to 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 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 nineteenth 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 behavior as being robotic, subject to mathematical laws. Studies of actual human behavior 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 behavior. Economic theory ignores, to its great loss, social aspects of human behaviors, 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 Positivism: This philosophy represents a sophisticated and complex misunderstanding of science, which rose to prominence in the earlier twentieth century, and had a spectacular crash later on, as philosophers became aware of its subtle but severe 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, behavioral psychology ignored the deeper and unobservable structures of human thoughts and emotions, and instead focused attention of observable behaviors, stimuli and responses. A similarly shallow analysis led economists to posit human behavior as being driven solely by the purpose of maximization of lifetime consumption. Focus on observables and quantifiables has led to a single-minded concentration on wealth as the sole goal of economic endeavor. 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 human 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 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 study of human beings and societies.