Lecture 3: Critique of Conventional Economics

1. From Light to Darkness

اللّهُ وَلِيُّ الَّذِينَ آمَنُواْ يُخْرِجُهُم مِّنَ الظُّلُمَاتِ إِلَى النُّوُرِ وَالَّذِينَ كَفَرُواْ أَوْلِيَآؤُهُمُ الطَّاغُوتُ يُخْرِجُونَهُم مِّنَ النُّورِ إِلَى الظُّلُمَاتِ أُوْلَـئِكَ أَصْحَابُ النَّارِ هُمْ فِيهَا خَالِدُونَ (2:257)

2:257 Allah is the Protecting Friend of those who believe. He bringeth them out of darkness into light. As for those who disbelieve, their patrons are false deities. They bring them out of light into darkness. Such are rightful owners of the Fire. They will abide therein

In previous lectures, we have seen that the problem of Islamization of Knowledge is complicated by the fact that many false claims about the nature of scientific knowledge are part and parcel of a western education. One of these false claims is the idea that social science and physical science are on par – they are both equal in terms of their status as valuable knowledge. The goal of this lecture is to show that this is false. In fact, major portions of the social sciences exemplify what is stated in the Ayat above: they represent a move from light into darkness. In this lecture, we will only deal with Economics, and not social science in general. A critique of Western social science, and why it incorporates assumptions conflicting with Islam is given in my paper “Origins of Western Social Science” Journal of Islamic Economics, Banking and Finance, vol 5, number 2, 2009. This paper can be downloaded from:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1357823

CLAIM: Knowledge of conventional western economic theories, is actually ignorance – someone who knows about how to apply Islamic teachings dealing with trade, wealth and financial matters can make better economic decisions for society than someone with a Ph.D. in Economics from Harvard.

This claim is startling and shocking, especially for Muslim economists. There are two reasons that this is a shocking claim. First, it seems incredible that the great genius shown by the West in physical sciences would go completely astray when it come to human sciences. Yet this is precisely what has happened. Tremendous advances in physical sciences have been accompanied by a tremendous decline in understanding human beings and society – which can be described as a move from light into darkness. The second reason is special to economists. If we decide that it is a monstrous mistake to think that mathematical equations can even approximately describe the vagaries of human behavior, then our many years of studying and teaching this subject have been wasted. Our minds recoil from this prospect, as accepting this claim would lead to a loss of an enormous amount of human capital invested in learning and teaching the pseudo-science of economics. However, Muslim economists can take comfort in the fact that Islamic teachings provide a solid alternative foundation for understanding economic affairs. Before going on to a detailed explanation, I list a few facts which provide evidence for my CLAIM stated above

• 1. The recent global financial collapse was not predicted by vast majority of economists. In fact, it is contrary to the dominant theories of rational behavior in the stock markets. One can go further to claim that it is precisely financial innovations based on wrong economic theories that was responsible for this collapse.

  2. In the wake of this collapse, and even before, many Nobel Prize winners and other eminent economists have made statements essentially equivalent to the claim above, arguing the modern economists know next to nothing about real world economics[1]. The current state of economic affairs, where the wealthiest five people have more money than the bottom billion combined, is clear evidence of the failure of economic theories to provide good economic outcomes for the planet as a whole.

  3. A huge amount of evidence can be provided for rapid and substantial moral decline in the West in the recent past. The search for instant gratification has led to the breakdown of the family, the fundamental unit of training in a society. As a result, a whole generation has grown up in broken families, without any clear guidance about moral values. In the political arena, the law of the jungle has been openly proclaimed by the powerful countries. Exactly as one can judge the physical sciences to be a success by looking at the spectacular products, so one can judge social science to be a failure by looking at the outcomes for individuals, societies, and nations in the west.

  4. The main reason for the failure of social sciences is that the moral and spiritual dimension of man has been completely disregarded. This is because western social science does not recognize the existence of these dimensions. Ignoring these dimensions leads to major misunderstanding of what human beings are, what motivates them, and what makes them content and satisfied. In fact, as the Quran states categorically: Q3:28 Who have believed and whose hearts find peace in the remembrance of Allah. Only in the remembrance of Allah do hearts find peace! . If one ignores the spiritual dimension of man, it is impossible to find peace and satisfaction. The current state of Western society provides ample testimony to this truth.

This provides the big picture which supports my claim that economic theory developed by the west has not done much good, either to the west or to the east. As the Marxists suggest, the theory only serves the interest of the capitalists against the rest of the world; as evidenced by increasing concentration of wealth among capitalists after the fall of Russia. There is a whole category of “heterodox” economists who have come to this same conclusion that I have CLAIMed above. However, they have not been able to come up with genuine alternatives, because they are stuck in the same secular paradigm, which denies the spirituality of man. This gives Muslims a unique opportunity: we can construct a genuine economics which can lead humanity out of the morass that it is currently stuck in. Our approach in this sequence of lectures is positive: we plan to provide an alternative, not just a critique. However, it is useful to begin with a critique to highlight defects that need to be overcome in an alternative theory.

[1] Nobel prize winner Stiglitz states that “[Economics as taught] in America's graduate schools... bears testimony to a triumph of ideology over science.” One of the architects of modern general equilibrium theory, Frank Hahn, writes that “Although I never believed it when I was young and held scholars in great respect, it does seem to me to be the case that ideology plays a large role in economics.” Nobel laureate Ronald Coase writes that “Existing economics is a theoretical system which floats in the air and which bears little relation to what happens in the real world.” Famous institutional economist and Nobel laureate Douglass North states that “We live in an uncertain and ever-changing world that is continually evolving in new and novel ways. Standard theories are of little help in this context. Attempting to understand economic, political and social change requires a fundamental recasting of the way we think.” Since none of the leading researchers in the physical sciences have publicly disparaged their own fields in this way, it is clear that there is a vast gap between physical and social science.

See also, central page on: Decline of Morality in the West