MGQ Summary AM01

AM01: Introductory Lecture on Islamic Approach to Advanced Microeconomics

PIDE: Sept 2017, Dr. Asad Zaman

1800 Word Summary by Madeeha Qureshi

Finding the truth behind neoclassical economic models: Dr. Asad Zaman’s Analysis

Thoughts are extremely powerful and once we realize their inherent power then we will find that not only we are what we believe of ourselves (or are made to believe of ourselves) but also through shaping our thoughts and belief system we can be knowingly and unknowingly made to follow wrong or right path depending on the guidance being given to us. Hence in this regard it is extremely important to filter out what ever knowledge that is coming our way so as to absorb the useful aspect of knowledge and garbage the knowledge that may involve someone ill intentions. Thus Islam distinguished strongly between useful knowledge and harmful knowledge; our Prophet Mohammad SAW made dua for increase in useful knowledge, and also sought protection from harmful knowledge.

So, the important question is: how do we distinguish between useful knowledge and knowledge that may be harmful to ourselves and also to society at large? The Quran and Hadeeth provide guidance for Muslims – knowledge that is conformity with the message of Islam is useful and valid, and knowledge which conflicts with that message is harmful. Also, Islam is the Deen of Fitra (nature); it’s teachings are built into the hearts of all human beings. If human beings listen to their inner voice then they will guided towards the good, since all good ideas about how we to live our lives can be traced back to Islamic teachings, which is the final, complete, and perfect message of God to mankind. However, it does require training, experience and skill to recognize the ideologies hidden behind ideas which may be expressed in a way to create misleading appearances. We need to develop some depth in our thinking and vision. Not only do we need to understand the theories, but we must learn how these theories are used to shape policies which help or hurt the lives of human beings. We need to ask ourselves – not only our mind but more so our heart – the implications of the theories we are learning. Will learning these theories enable us to lead better lives, in conformity with the pattern of excellent conduct demonstrate to us by our Prophet Mohammad S.A.W?.

The above way of thinking has been defined by Dr. Asad as Meta-thinking where we as unbiased external observer analyze what theory says, why it may have been created by its initiator and what could be their plausible biases and who a given theory is benefiting and whom it is harmful. Such deeper level thinking is important in our every day to day life chores but especially within our professions. As economists too, we need to analyze these questions not only to understand the working of economic systems and their implications on societies but also to understand and realize our inner life goals and objectives. The question that we need to ask ourselves is that what our intentions were when we chose to become economist. Was it to get a job and earn livelihood for ourselves and our families or was it to understand the mechanism that generate economic outcomes to improve social lives of society that we live in and overall that of the whole humanity. If we look into our conscious we will realize that our inner selves motivate us to be good, kind, compassionate to others and help others and yes everyone at any stage of life whether as a child, as a dreamer, as a student and as a parent or as a professional has this seed of goodness implanted within them for this is the natural inclination Allah has given us. But then the question that we need to ask ourselves is that why when we start learning economics the first think we are taught is of the an imaginary economic agent for whom to be rational means that they have to be selfish and maximizers of their utilities and profits. If we look deeper this very notion conflicts with our inner voice. However this is also true that once one keeping reading the ideology of this imaginary self-interested agent again and again then it will start coinciding with our voice of nafs which will say yes lets indulge into greed, more is better etc. so Hence even if one meditate on this single thought of selfish agent there will be split between our mind and heart where our heart will say no this does not make sense, by sharing things there will be more barkat as Allah will enhance our rizq, while our mind (voice of nafs) will probably guide us to wrong path of greed and selfishness where you will say that why should you let go of present benefit for some future gain which may come or not. As Muslims we can see this all about faith and tawakkul on Allah. For ALLAH orders us do good deeds and believe that its reward will be given indeed. Now it is up to ALLAH to give us reward in whatever way – maybe we will receive the reward immediately in this life but it could be that reward of that good deed may be entirely given in life after and not in this world and no doubt that is the best reward for a believer. Hence just as faith is blind and lies in one’s heart so is the art of searching the truth – one has to follow the voice of heart and not of mind and logic. So as student of economics we need to be clear in our intentions that whatever knowledge we seek is so as we remain in path of truth and that in due journey of finding this truth we seek protection of ALLAH’s from all the false ideologies that may blind us from finding correct knowledge that may enter our heart directly. And with this intention we will start analyzing the truth behind the neoclassical paradigm on which current economic textbook are based.

A few key points in this regards from lecture 1 of DR. Asad Zaman Micro-economic course 1 (AM01) are as follows:

The implications of Modern Economic theory are strongly in conflict with empirical evidence. Digging into the reasons why these theories have no match with reality, we find the following problems:

1. Dramatically wrong assumptions about human behavior, based on a drastically wrong understanding of what it means to be human. In particular, human beings do not MAXIMIZE utility, because they do not usually know the range of choices open to them, and do not know the consequences that will follow, and cannot evaluate the utility of these consequences. In general, SATISFICING, finding some option that appears satisfactory, is a more reasonable model for human behavior.
2. Firms face a highly uncertain environment, which makes it impossible to maximize. The assumptions of full information and zero transaction costs do not hold. Thus firm behavior is often based on rules and heuristics, instead of maximization of profits. Profits are generally highly unpredictable, as we will demonstrate by simple and clear examples.
3. In complex systems, the behavior of the aggregate cannot be derived by adding up the behavior of the individual parts, because there are interactions.
   1. So aggregate demand cannot be derived by summing up the individual demand curves. If every individual looks at how the group is behaving in order to determine his own behavior (or demand), than the demand curve cannot be determined by adding up separate demands. Also, the Sonneschien-Mantel-Debreu Theorem shows that properties of demand based on utility maximization for a single consumer WILL NOT hold if we have several consumers and we consider the aggregate demand function.
   2. Similarly, the Industry supply cannot be obtained by adding up the supply curves of the individual firms. Even though individual firms are small in perfect competition, the industry as a whole is large. If every firm makes the decision to hire an additional laborer, then the labor demand of the industry will go up and cause the wage to rise. This means that the assumption that a firm is small and its demand for labor does not affect price of labor is not valid at the industry level, even though it may be valid at the firm level.

In light of fact that empirical evidence is in conflict with  implication of neoclassical economic models and how these models are based on unrealistic assumptions, the immediate question arise that why do such theories persist and how have they become such a dominant voice that they have taken up central place in text books and now shape students’ minds all over the world?

To find answer to above query, it is important that we understand the policy lessons that will come out from application of such theories. In course of the lecture Dr. Asad points us to many such lessons such as how free markets are being promoted and government regulation is being rejected to name a few.

So now another deeper question arise that why are these paradigm promoting free market mechanism or put it differently – one needs to assess who benefits from promotion of free market question. This now points to question of distribution of wealth and now it is important to assess that how will freeing the markets from government regulation will impact the wealth of different quintiles. In this regard Dr. Asad points us to how research evidence show that it will only benefit the top 1%. And how bottom 90% will be completely be marginalized meanwhile middle 9% will work to earn benefits from top 1% so as fulfil their own materialistic desire and will become slaves of their greed.

Now there is more clarity as now we can easily complete the circle to reach to truth behind the neoclassical economics. And truth that come out is that the neoclassical economic was indeed created as intellectual force to not only justify the wealth accumulation of top 1% but also as means to shape the minds of students in a way that they become completely subservient to interest of the top 1%. For after being trained in this paradigm and with one’s livelihood being dependent on one’s training, not only will they find it hard to recognize and resist such false ideologies but they will unknowingly produce work that will give false policy implications and hence the inertia of such paradigm will persist.

Hence in context of economic thinking too we need to realize that there exist many forces that have worked to derail humanity from path of ALLAH that is to develop a society where there is care of every person and there is equality. And in this series of lecture Dr. Asad will help us unfold such blinders to see the truth inshallah by will of Allah. Aameen

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