All three parts in one place, for convenience of readers: The Global Financial Crisis of 2007
A link to the published article in Express Tribune
The Current Crisis in Economics
Part II: Historical Roots
Dr. Asad Zaman
The current crisis in economic theory has deep historical roots. To understand it, we must go back to sixteenth century Europe. Continual warfare and bloodshed among different Christian sects led to the search for a secular basis for society. How can we achieve cooperation in a society composed of religious groups with different goals? Secular thinkers promoted freedom and wealth as the core values of a secular society. One could expect different groups with conflicting goals to agree to these as common goals for the society. Freedom and wealth would provide each group with the possibility and material means to pursue whatever goal they desired.
Considerable effort was put into promoting freedom and wealth as desirable collective goals, because these were in conflict with prevailing and dominant religious conceptions. Efforts of secular thinkers led to the transition from the Biblical maxim“the love of money is the root of all evil” to its opposite: “lack of money is the root of all evil”. Duty to society takes precedence over individual liberty in traditional society. Secular thinkers created a political theory which puts individual freedom above claims of the social order.These momentous changes were fundamental in creating the modern world.
Secular thinkers disagreed about effects of allowing individual freedom and pursuit of wealth on society. The disagreement was about the nature of human beings. Rousseau felt that human beings were naturally good, and hence advocated anarchy – no rules or regulations of any kind were required. On the opposite extreme, Hobbes thought that human beings were naturally evil. Without strong government enforcement of extensive laws, life would be “nasty, brutish and short,” if people were allowed complete freedom to act as they desire. Locke took an intermediate position, finding society and government necessary, but with minimal rules acceptable by all.
The debate between Locke and Hobbes continues to this day in various guises. The Hobbesian view was that extensive government control and regulation in all spheres of life is required for a stable social order. Followers of Locke argued that minimal control would suffice. A very important ingredient in the victory of minimal government views was the “invisible hand” argument of Adam Smith. He argued that even though people are selfish, society would benefit by allowing them freedom to pursue self-interest. This provided a counter to the Hobbesian idea that selfish individuals would destroy society unless there was extensive government control.
Laissez-Faire economics is based on intellectual grounds prepared by Locke and Smith. It argues that one should allow maximum freedom to individuals in the economic sphere. We are witnessing today the outcomes of a social experiment spanning two centuries. Whereas traditional societies warn strongly against pursuit of pleasure and wealth, secular thinkers thought that these baser tendencies of humans could be harnessed for the betterment of society. As long as the institutional frameworks of politics, justice, and society were sound, allowing freedom for pursuit of wealth would enrich society.
All religions and cultural traditions have asked individuals to sacrifice selfish pleasures to fulfill social obligations, and frowned on pursuit of wealth. The outcomes of this social experiment make clear why this is so.Contrary to the expectations of secular thinkers, individualistic pursuit of wealth and pleasure did not remain confined to the narrow domain of economic activities. When profits were permitted to trump compassion, the odious actions of Shylock the Jew became socially acceptable.Bankers threw millions out of their homes for nonpayment of interest after the financial crisis of 2008. On the family front, placing pleasure over duty has led to ever increasing divorces, infidelity, and illegitimate children. According to a recent report on Fractured Families, “the fabric of family life has been stripped away.” The relation between greed and the global financial crisis will be discussed in the third and last part of this essay.
- For a collection of writings presenting critiques of conventional economic theories, see: Guide to Economics.
- Causes of Global Financial Crisis III: The New Millenium, published May 23rd, 2011 [Part III} of this article
- Global Financial Crisis of 2007: Collection of all three articles in this series, as published in Islamic Finance Review.