My publications in Economics are built around the theme that conventional neoclassical theories are fundamentally flawed, and must be rejected in toto. A sequence of three (short) newspaper articles on the Global Financial Crisis of 2007-8 explains the failures of economic theories for a popular lay audience. Deeper and more detailed explanations of failures of economic theories in different dimensions are documented in my writings referenced below. Creation of viable alternatives to current economic theories is also considered, especially in my most recent articles — for example, Islamic Versus Economics.
“Existing economics is a theoretical [meaning mathematical] system which floats in the air and which bears little relation to what happens in the real world”
Many similar quotes from top ranked economists show that conventional economic theory is a branch of mathematics with NO relation to economic realities. Some time ago, a discipline entitled “phrenology” was created, widely believed, and taught in colleges in the nineteenth century. Economic theory currently taught in leading universities throughout the world is the modern day analogue of this pseudo-scientific discipline. Most of my writings on economics are devoted to establishing this fact, which seems shocking and unbelievable to the average reader. In the wake of the financial crisis of 2007-2008, it has become more believable, because none of the leading economists were able to forecast the greatest crisis of the century. That there must be glaring gaps in economic theories was so obvious that a Congressional Committee was set up in 2010 to investigate the failure of economic theory to predict the crisis.
Nonetheless, what I am claiming is the equivalent of saying that witchcraft is currently being taught at Harvard. Such an extravagant claim requires a tremendous amount of documentation and explanation, and I have provided a lot of the required evidence in a variety of papers. Different dimensions of the proofs for this admittedly extraordinary claim are discussed below.
FIRST, the claim itself — that conventional economics theory, as currently taught in leading universities throughout the world, is not worth the paper it is written on. An extensive list of failures in nearly every dimensions has been detailed in: An Islamic Critique of Neoclassical Economics. Some crucial elements of this critique are:
- Economic theory of consumer behavior — utility maximization — is wrong. For the extensive empirical evidence on this issue, see The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature.
- Economic theory of firm behavior — profit maximization — is wrong. See Debunking the Theory of the Firm — A Chronology
- These two theories are put together to create the Supply and Demand model for determination of equilibrium prices. This model is wrong; prices are not determined by supply and demand. See The Conflict Between General Equilibrium and the Marshallian Cross. The paper shows that supply and demand cannot be a valid description of a single market, if general equilibrium theory which connects all markets, holds.
- Finally, it is argued that allowing free market forces to operate leads to optimal or efficient economics outcomes. Failures of the Invisible Hand shows that four central claims of current leading economic textbooks are wrong. A deeper exploration of historical roots of this doctrine of the invisible hand are available in: Death of a Metaphor: The Invisible Hand.
Altogether, there is overwhelming and conclusive evidence, both empirical and theoretical, that all ingredients of the conventional syllabus of economics are completely wrong.
TWO: An important barrier to believing this claim is that the same methods have created almost miraculous advances in physical sciences. How can it be that spectacular achievements in science and technology can go hand-in-hand with a completely bogus social science? The answer to this question is provided in detail in my paper on Origins of Western Social Science. The story is long and complex, and is also completely in conflict with dominant Western accounts of the same story. The first point to understand is the reason for Western rejection of Christianity. Contrary to the claim that this was due to the triumph of reason over superstition ( The Enlightenment, which occurred uniquely in the West), the truth is that it was the deep corruption and immoral behavior of religious leaders in Europe that led to this outcome. These historical details are provided in European History: Lessons for Muslims. To conclude: success of the physical sciences is not evidence for the validity of social sciences.
THREE: The Deification of Science. As a consequence of rejection of Christianity, it became necessary to search for a new basis for certain knoweldge in Europe. Betrayed by their religious leaders, the Europeans vowed to trust only that which they could touch and prove. Scientific knowledge, based on observations and logic, took the place of sacred knowledge earlier provided by Christianity. There was a determined effort to prove that science leads to certain knowledge, and that only knowledge produced by scientific methods is valid knowledge — all other types of human knowledge are just superstitions. This effort led to the creation of Logical Positivism, which was the dominant philosophy throughout the middle of the twentieth century, and continues to exercise a powerful influence on European intellectuals to this day. Based on wrong ideas about science provided by logical positivism, a new methodology for economics was created in the early twentieth century. Despite the eventual failure and complete rejection of logical positivism, the foundations of economics continue to be based on this wrong philosphy, and have not been revised. As I have shown in Deification of Science and its Disastrous Consequence, appropriate methodology for social science which deals with human behavior, must be different from the methodology for physics, which deals with mechanical and determinate behavior. An important reason for the complete failure of modern economic theory is the adoption of the wrong methodology from physical sciences: Unlike physics, social science methodology must involve normative elements, prescribing ideal forms for society
FOUR: A major puzzle is created by the idea that social science in general, and economics in particular, is based on an entirely wrong methodology. It is obvious that Europeans are very intelligent. Surely, they would have realized the errors in these theories, especially gross errors, and made moves to correct them. To understand the persistence and accumulation of entirely wrong theories, one has to understand the Power/Knowledge link pointed out by French philosopher Michel Foucault. He shows how our knowledge of social science is strongly shaped by considerations of power. Current economic theories persist not because they are true, but because they serve the interests of the powerful. My article Power/Knowledge and Economic Theories shows how economic theories are shaped by the powerful. The book Orientalism by Edward Said showed how Western theories about the East were shaped by the experience of imperialism, which gave West power over the East. To have an understanding of modern economic theory, it is essential to understand how it serves the interests of the rich and powerful — a very important book which explains this connection very clearly is Naomi Klein: The Shock Doctrine: The Rise of Disaster Capitalism . A condensed an abbreviated version of the historical struggles for power, and how they shaped economic theories, is given in The Rise and Fall of the Market Economy. To summarize: Despite overwhelming evidence against them, economic theories continue to be taught because they serve the interests of the rich and powerful.