Economics for the 21st Century
Published on 22 Jan 2018 in Newsline Magazine as “ Cradle of A New Economics“. 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. Why is there such strong resistance to change, even in face of a pressing need for it?
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 Positivism represents 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.
Dr Asad Zaman is a Vice Chancellor at PIDE. He blogs at An Islamic WorldView.