Author Archive

Modern money and inflation

November 28, 2022 3 comments

from Asad Zaman

Milton Friedman was a powerful magician. His words charmed people into believing that night was day, against the evidence of their own eyes. Friedman’s maxim that “inflation is everywhere and always a monetary phenomenon” is widely believed by economists, even though it is abundantly obvious that costs of production, especially energy costs, play a major role in creating inflation.

                                             Pinochet meets Friedman (STF/AFP/Getty Images)

Today, inflation is soaring around the globe. Economists under the spell of Friedman search for, and find, monetary causes. Central Banks around the world pursued vastly expansionary monetary policies to combat the Great Recession which followed the Global Financial Crisis of 2007. To the great surprise of many top-ranked economists, there was no inflationary impact. Emboldened by this experience, Central Banks again poured money into a stuttering economy during the COVID era. Again, inflation did not respond. But now, after the end of all this monetary expansion, high inflation has suddenly hit. Since Friedmanites believe that inflation must have monetary causes, they are forced to think that the fifteen years of monetary expansion since 2008 suddenly caused soaring inflation in 2022. Read more…

Weekend read – Four flaws in foundations of statistics

October 9, 2022 2 comments


from Asad Zaman and the WEA Pedagogy Blog

Rejecting Arbitrary Distributional Assumptions

In the early 20th Century, Sir Ronald Fisher initiated an approach to statistics that he characterized as follows:: “… the object of statistical methods is the reduction of data. A quantity of data, which usually by its mere bulk is incapable of entering the mind, is to be replaced by relatively few quantities which shall adequately represent the whole …” As he clearly indicates, we want to reduce the data because our minds cannot comprehend large amounts of data. Therefore, we want to summarize the data in a few numbers which adequately represent the whole data set.

It should be obvious from the start that this is an impossible task. One cannot reduce the information contained in 1000 points of data to two or three numbers. There must be loss of information in this process. Fisher developed a distinctive methodology, which is still at the heart of conventional statistics. The central element of this methodology was an ASSUMPTION – the data is a random sample from a larger population, where the larger population is characterized by a few key parameters. Under these assumptions, the key parameters which characterized the larger population would be sufficient to characterize the data set at hand. Under such assumptions, Fisher showed that there were “sufficient statistics” – a small set of numbers that captured all of the information available in the data. Thus, once in possession of the sufficient statistics, the data analyst could actually throw away the original data, as all relevant information from the data set had been captured in the sufficient statistics. Our goal in this section is to explain how this methodology works, why it was a brilliant contribution of Fisher at his time, and why this methodology is now obsolete, and a handicap to progress in statistics. Read more…

Real statistics: a radical approach

June 13, 2022 4 comments

from Asad Zaman

In a previous posts Preface to Radical Statistics and Why an Islamic Approach to Statistics?, I have explained how we can develop a new approach to statistics, which rejects a century of developments based on a methodology created by Sir Ronald Fisher, father of modern statistics. It is my hope that this will be a disruptive technology – it will eventually sweep away the entire structure of knowledge which has been built up under this name, and replace it with a radically different alternative. This structure of statistics (which I studied in detail and depth at the Ph.D. Statistics program at Stanford University), is currently being taught in universities around the globe. This structure is deeply deficient for a number of reasons. The most important among these is the logical positivist philosophy which was used to create the foundations of this discipline in the early 20th Century. We briefly describe the key problems created by this.

First, a very brief introduction to the Logical Positivist philosophy. Over a century of brutal and massively destructive religious warfare between Christian factions made it necessary for European intellectuals to find an alternative to religion on which to create a secular political science. Bitter experience had shown them that Christianity was highly unsuitable for this purpose. Ultimately, over the period of more than two centuries, this led to the creation of a whole body of knowledge which forms the foundations of secular modernity. Read more…

Weekend read – Fisher’s flawed foundations of statistics

February 12, 2022 Leave a comment

from Asad Zaman

This lecture is about the personality of Sr Ronald Fisher and his foundational ideas about statistics. The idea that statistics is all about “data reduction” is due to lack of computational capabilities at the time of Fisher – it was not possible to analyze 1000’s of data points, without reducing them to manageable summaries. Even though computer capabilities now make this possible, intellectual inertia has kept the discipline of statistics bound to the now obsolete mold into which it was cast by Fisher.

Fisher was a prominent Eugenicist, and he had six children in accordance with his belief that the path to improvement of the human race involved increasing the propagation of superior specimens of humanity. A central question for us is:  “Is modern statistics FREE of its Eugenicist origins?”. The minority position is NO. This position is described and well defended by Donald Mackenzie in his book: “Statistics in Britain,1865 to 1930:The Social Construction of Scientific Knowledge”. He writes that “Connections between eugenics and statistics can be seen both at the organisation level and at the deiailed level of the mathematics of regression and association discussed in chapters 3 and 7. Without eugenics, statistical theory would not have developed in the way it did in Britain – and indeed might not have developed at all, at least till much later.” In brief, Eugenics shaped the tools and techniques developed in statistics. However, the Dominant View is that Moderns Statistics is FREE of its racist origins. This view is ably defended by Louçã, Francisco in his article on “Emancipation Through Interaction–How Eugenics and Statistics Converged and Diverged.” Journal of the History of Biology 42.4 (2009): 649-684. He argues in favor of the Consensus View: There is no doubt that origins of statistics are due to Eugenics project, but it has now broken free of these dark origins.

In this part of the lecture, we look at the personality of Fisher, and assess how it shaped the foundations of statistics. It is acknowledged by all that Fisher cantankerous, proud & obstinate. He would never admit to mistake, and was stubborn in defending his position, even against facts. He was also vengeful: To oppose Fisher was to turn him into a permanent enemy. In many battles, Fisher took the wrong side. HOWEVER, he won most of his battles because of his brilliance, to the detriment of truth. The impact of Fisher’s victories has permanently scarred statistics, and continue to guide the field in the wrong directions. This lecture is about SOME (not all) of his fundamental mistakes.

Perhaps the most basic, and also the most confusing, was the battle between Fisher and  Pearson regarding the testing of Statistical Hypothesis. This is confusing because today both of the two conflicting positions are taught to students of statistics simultaneously. Even though the conflict was never resolved, it is now ignored and glossed over, buried under the carpet. The Fundamental Question is “WHAT is a hypothesis about the data?”. According to Fisher, . . . read more

Weekend read – More quotes against economics

December 17, 2021 6 comments

from Asad Zaman

A previous post Quotes Critical of Economics collected assorted quotes which are useful in writing up different kinds of critiques of economics. In addition, I collected quotes from Romer’s Trouble With Macro which are sharply critical of economics. In terms of the “Loyalty, Voice, Exit” paradigm, I look for “Exit” quotes, which suggest that we need to throw out the entire discipline and rebuild on new foundations; for a proposed alternative, see “Uloom-ul-Umran: An Islamic alternative to Western Social Science“. I try to avoid “Voice” critiques which suggest that we can rescue economics by making modifications, minor or major. I have been collecting more quotes along these lines for two years. I was hoping to sort them into categories, and organize them via some commentary, but have not found the time to do so. So instead of waiting longer, I am just publishing them as a random and disorganized collection – given below.

For Marx, ‘pure’ economic theory, that is economic theory which abstracts from a specific social structure, is impossible. It would be similar to ‘pure’ anatomy, abstracted from the specific species which is to be examined. (Ernest Mandel’s Introduction to Fowkes translation of Das Kapital).

Chicago economist Ronald Coase attributed a satirical description of it to the English economist Ely Devons: ‘If economists wished to study the horse, they wouldn’t go and look at horses. They’d sit in their studies and say to themselves, “What would I do if I were a horse?”’  From Radical Uncertainty by Kay and King.  Read more…

More quotes against economics

December 3, 2021 1 comment

from Asad Zaman

A previous post Quotes Critical of Economics collected assorted quotes which are useful in writing up different kinds of critiques of economics. In addition, I collected quotes from Romer’s Trouble With Macro which are sharply critical of economics. In terms of the “Loyalty, Voice, Exit” paradigm, I look for “Exit” quotes, which suggest that we need to throw out the entire discipline and rebuild on new foundations; for a proposed alternative, see “Uloom-ul-Umran: An Islamic alternative to Western Social Science“. I try to avoid “Voice” critiques which suggest that we can rescue economics by making modifications, minor or major. I have been collecting more quotes along these lines for two years. I was hoping to sort them into categories, and organize them via some commentary, but have not found the time to do so. So instead of waiting longer, I am just publishing them as a random and disorganized collection – given below.  read more

Causality as child’s play

November 26, 2021 1 comment

from Asad Zaman


Tips for teaching your child to play nicely with others | Boys TownStudy of causality confronts us with a huge dilemma. Intense controversy has raged for centuries over this topic among the philosophers. At the same time, studies of child development show that infants learn about causal concepts almost from birth, and toddlers have a sophisticated approach to causality. How can causality be easily understood by babies, but remain confusing and complicated to the best philosophers for centuries? The difficulty is compounded by the fact that philosophical approaches serve as a basis for empirical data analysis in statistics and econometrics. Even though correct estimation of causal effects is essential for policy, widely used econometric textbooks are deeply defective in their approaches to causality.

Angrist and Pischke (2017) examine leading popular econometrics textbooks and conclude that these are based on an outmoded paradigm which ignores causality. They call for a pedagogical paradigm shift. Chen and Pearl (2013) also examine six leading econometrics textbooks and come to the same conclusion: these textbooks fail to explain central causal concepts with any degree of clarity. Even though Angrist and Pischke agree with Chen and Pearl on the diagnosis, the two sets of authors offer radically different remedies. Since the 1990’s Pearl and his group have been arguing for an approach based on Directed Acyclic Graphs (DAGs) as central to understanding causality. Angrist and Pischke (2008, 2013) have written two econometrics textbooks which exposit causality using a “Potential Outcomes” approach, and make no mention of DAGs. Thus, while everyone agrees that causality is very poorly handled in econometrics, there is no agreement about the solution to this problem. This has serious implications since philosophical controversies about causality ramify to the policy context involving real data and applications.  read more

Weekend Read – Hockey Stick or Growth Illusion?

July 10, 2021 6 comments

from Asad Zaman

Most economists are committed to Friedman’s methodology which advocates a nominalist philosophy of science. Theories do not aim to discover hidden real structures which explain the observations. Instead, they aim to “save the appearances”: provide a good match to the observations. Although a small minority of voices has advocated a realist methodology – Bhaskar Roy, Peter Manicas, Tony Lawson, and some others – the vast majority remains unconvinced. One important reason for this is the Duhem-Quine thesis. Any given set of core assumptions about hidden reality can be put into conformity with any collection of observations by suitable auxiliary assumptions. Furthermore, the protective belt for core theory can accommodate any incoming stream of contrary observations. Peter Manicas in History and Philosophy of the Social Sciences has argued that the conclusion from this is that we should abandon the quest for certainty, instead of the quest for realism. However, his arguments are unfamiliar and ignored. Although I agree with Manicas, it is not my purpose to argue for realism in this post. Rather, I want to consider more carefully the consequences of the Duhem-Quine thesis – we can find an infinite number of essentially different models to fit any finite collection of data. Read more…

Causal explanation of autonomy and invariance of regression relationships

from Asad Zaman

Brief History of Econometrics: Launched in early 20th Century by Ragnar Frisch, econometric methodology was strongly shaped by the Cowles Commission (CC) in the 1960’s. The CC approach relied on structural equations, which embodied causal information known in advanced to the researcher. The goal was estimation of causal effects, and not discovery or assessment of the hypothesized causal structures. The oil shock of the 1970’s led to dramatic failures of macroeconomic regression models, leading to general distrust of econometric methodology. Two major critiques emerged.  read more

Brief history of econometrics

April 26, 2021 5 comments

from Asad Zaman

Launched in early 20th Century by Ragnar Frisch, econometric methodology was strongly shaped by the Cowles Commission (CC) in the 1960’s. The CC approach relied on structural equations, which embodied causal information known in advanced to the researcher. The goal was estimation of causal effects, and not discovery or assessment of the hypothesized causal structures. The oil shock of the 1970’s led to dramatic failures of macroeconomic regression models, leading to general distrust of econometric methodology. Two major critiques emerged. The Sims critique argued that hypothesized causal structures were false, and should be abandoned. We should go back to a purely descriptive analysis, looking for patterns in the numbers, without any reference to the real world phenomena represented by these numbers. Directly opposite was the Lucas critique which said that regression models were based on surface relationships between the numbers and ignored the deeper causal structures which drive these relationships. Regression models would fail when economic regimes underwent structural change – precisely when they were most needed. Neither approach has led to successful macro models. Models based on both approaches, as well as more conventional macro models, failed dramatically in the Global financial crisis. The fundamental problem lies in the failure of econometrics to incorporate causal inference correctly.

Causal Explanation of Autonomy & Invariance of Regression Relationships

Causal versus Positivist Econometrics

April 17, 2021 1 comment

from Asad Zaman

Defining Feature of Real Econometrics

We can define “Real Econometrics” as being the search for causal relationships within a collection of variables. There exists an enormous amount of confusion about what exactly is a causal relationship. We will take a simple and practical approach, developed by Woodward in his book on “Making Things Happen”. Given a collection of variables X,Y,Z1,Z2,…,Zn, we will say that X is a cause of Y if we can create changes in Y by changing the values of X. This is a “practical” definition in the sense that if we learn about causal relationship, we can use it to create changes in the world around us.

Why is there confusion about causality?

Children (and animals) are born with the ability to learn about causal relationships, and to use them to bring about desirable changes in their external environment. Since understanding of causation is built deeply into us, ordinary people find it difficult to understand why philosophers are so confused about causality. We need to discuss this issue because dominant methodology of statistics and econometrics is built on foundations of a philosophy (logical positivism) which is a source of enormous confusion. However, students should not worry if they fail to understand the source of this confusion. The point of trying to explain this is to explain why conventional statistics and econometrics is wrong. It does not matter for learning real statistics.  read more

Econometrics versus reality

March 31, 2021 10 comments

from Asad Zaman

Underlying Philosophy of Science

Many important structures of the real world are hidden from view. However, as briefly sketched in previous lecture on Ibnul Haytham: First Scientist, current views say that science is only based on observables. Causation is central to statistics and econometrics, but it is not observable. As a result, there is no notation available to describe the relationship of causation between two variables. We will use X => Y as a notation for X causes Y. Roughly speaking, this means that if values of X were to change, then Y would have a tendency to change as a result. This is not observable for two separate reasons. ONE because it is based on a counterfactual. In another world, where the value of X was different from what was actually observed in our current world, this change would exert pressure on Y to change. TWO X exerts an influence on Y, but there are other causal factors which are also involved. Thus Y might not actually change in the expected direction because the effect of X  might be offset by other causal factors which we have not accounted for. For both of these reasons, causality is not directly observable.

Achieving Conceptual Clarity  read more

Critique of Rajan on debt

February 2, 2021 6 comments

from Asad Zaman 

“my views are based on insights acquired from MMT, but  .  . . . . . . . . . . . ”         

In this post, I will provide a critique of Raguram Rajan’s article “How Much Debt is Too Much?”. (Alternative link to Rajan’s article)

The article opens with a description of the governments “opening their coffers, to support small households and firms” in the COVID era. Required spending has been on the order of 15-20% of the GDP, and the article examines the extent to which government can finance this extra expense by borrowing at low interest rates from the private sector.

The language reminded me Robin Hood and his team swooping down on government convoys laden with coffers of gold. In face of this generosity by the government, it seems churlish to examine their coffers, to see if they contain gold, or just paper promises. Rajan’s theories are based on archaic understandings of money as gold. Rajan’s article assumes, without discussion, the following premises:

  1. Government are like households. Spending must by financed by taxes or borrowing.
  2. Borrowing from private sector increases the amount of money available for government spending.
  3. Government ability to pay off the debt created by private borrowing depends on the interest rate, and on its capabilities to raise revenues (by taxation or borrowing) in the future.

All three of these propositions are false, as would be evident to readers of my earlier post on ABC’s of MMT. It is worth clarifying that my views are based on insights acquired from MMT, but need not coincide with the official doctrines of MMT.

To begin with, we must ask why . . .  read more

Marilyn & the Goats: A new solution to an old problem

January 21, 2021 2 comments

from Asad Zaman

Introduction: In a previous lecture, we gave a New Definition of Probability. In this lecture, we will show how this definition enables us to resolve the massive amount of controversy which surrounds an apparently simple probability puzzle, known as the Monty-Hall problem. The book The Power of Logical Thinking, quotes cognitive psychologist Massimo Piattelli Palmarini: “No other statistical puzzle comes so close to fooling all the people all the time [and] even Nobel physicists systematically give the wrong answer, and that they insist on it, and they are ready to berate in print those who propose the right answer.” Before proceeding to discuss this problem, we review the key features of our new definition:

  1. Probability is a feature of external reality, not an aspect of our ignorance/knowledge.
  2. Probability exists PRIOR to occurrence of random event.
  3. Probability is EXTINGUISHED after event occurs.  Read more

A new definition of “probability”

January 13, 2021 4 comments

from Asad Zaman

An article by Alan Hajek in Stanford Encyclopedia of Philosophy lists six major categories of definitions. Many more are possible if causality is also taken into account. These definitions conflict with each other, and face serious problems as interpretations of real-world probabilities. The basic definition of probability we will offer in this lecture falls outside all of these listed categories. Before going on to present it, we briefly explain why there is such massive confusion about how to define probability.  read more 

Why do we need pluralism in times of disruption? A practical guide

January 7, 2021 1 comment

from Asad Zaman

Today we are going through a period of disruption due to the COVID-19 pandemic that impacts us individually and collectively in an unprecedented manner. Because we see how interconnected we are, the sense of unity, solidarity in time of crisis is necessary. So why bother with pluralism in the first place?

Introductory remarks about pluralism and the new normal

We are currently in an unprecedented moment in human history. Although humanity went through several pandemics and disruptions, this is the first time that all the globe is equally affected by the virus, and everyone, everywhere, has to deal with the lock-down and its consequences. Our normal is gone, and we do not know what is ahead of us. The world as we knew it is not there, and there is little left of the “normal” to hold on to. We see the health devastation around us, and worry about the galloping economic crisis, and the social impact of both. We are all urgently seeking for any leftover certainty we can get. This is why it is so important to have standards and to have some objective basis for our understanding of what is happening with us, our societies and economies under the risk of COVID-19. All the more, given the highly politicised debates about coronavirus, misinformation, and fake news spreading – we need something reasonable to ground ourselves in this new reality. A pluralist tolerance to everyone’s right to personal freedom of choice, autonomy, affirmation of differences of perspectives seems to be the last wanted thing right now – especially in science – in navigating through these disruptive times. But is it?  read more

Debt, levered losses, & unemployment

December 29, 2020 Leave a comment

from Asad Zaman

A previous post on “Causes of the Global Financial Crisis” provided a detailed summary of the first three chapters of “House of Debt” by Mian and Sufi. This post provides a brief summary of Chapters 4 and 5, in which they present a theoretical framework which explains why leveraged debt leads to high unemployment following a shock to asset prices. The main insight is that the problem is caused by interest-based debt contracts which put most of the risks of default on the weaker party (borrowers), and very little on the stronger party (lenders). Equitable risk sharing between lenders and borrowers would provide a solution.

Background: In the Keynesian Revolution and the Monetarist Counter-Revolution, I have explained how high and persistent unemployment after the Great Depression led to Keynesian insight that government interventions are required to create full employment. This is in conflict with the supply side view, which insists the free markets automatically lead to full employment of all productive resources, including labor. The Reagan-Thatcher era created a counter-revolution against Keynesian theory, and re-implanted the rejected supply side view at the heart of the economic theory. Accordingly, policy responses to the Global Financial Crisis were based on the wrong dogmas. Chapters 4 & 5 of HoD describes the Supply Side view, explains why it is wrong, and then provides an alternative theory to explain the GFC: the Levered Losses framework. read more

Differentiating social, market, and government debts

December 25, 2020 Leave a comment

from Asad Zaman

In a previous post on “ABC’s of MMT”, I explained the basics of MMT as a preliminary to a critique of Raghuram Rajan’s article on “How Much Debt is Too Much?”. A significant part of the discussion on this post consisted of debates over words and their meanings. My use of words like assets, savings, wealth, liability, and debt was contested, and alternative usages were offered. It seems necessary to pause for a discussion of these terminological confusions, prior to going on Rajan’s article. This is because part of the critique is about the terminology used by Rajan. Standard terminology is based on false analogy between the government and the household. In a previous post on “The Power of False Names”, I have explained how the use of misleading terminology can lead to severe misunderstandings and wrong policies.

A deeper understanding of contested meanings of debt, liability, assets, savings, wealth, and related terms, emerges from the study of the history of debt in David Graeber’s “Debt: The First Five Thousand Years”.  Graeber writes that “Arguments about who really owes what to whom have played a central role in shaping our basic vocabulary of right and wrong.” One of the key arguments of Graeber is that there are two kinds of debt.  read more

ABC’s of Modern Monetary Theory (MMT)

December 13, 2020 20 comments

from Asad Zaman

I was overwhelmed by the level of ignorance displayed by distinguished economist Raghuram Rajan in his article entitled “How Much Debt Is Too Much?” published recently in Project Syndicate on Nov 30, 2020. I had meant to write a critique of the article, but to do so requires starting from the very beginning. In this post, I go over some basic MMT concepts, in order to prepare the ground for this critique. There are now many good videos explaining these basics. I will go over six questions discussed in the first ten minutes of “Modern Money & Public Purpose 1: The Historical Evolution of Money and Debt” by Professor L Randall Wray. Learning the answers to these questions provides foundations for understanding MMT which are evidently missing in Rajan’s paper. Professor Wray asks us to decide on True/False for the following six statments:

  • Q1:Just like a household, a nation has to raise money to finance its spending through income or borrowing.
  • Q2:The role of taxes is to provide finance for government spending
  • Q3:The national government borrows money from the private sector to finance the budget deficit
  • Q4:By running budget surpluses, the government takes pressure off the interest rates because more money is available to the private sector for investment projects
  • Q5:Persistent budget deficits will burden future generations with inflation and higher taxes
  • Q6:Running budget surpluses will provide the government with the resources needed to finance spending on retirement benefits for the ageing population in the future

It is easy to score the quiz because  . . read more

Economics as moral philosophy

December 6, 2020 29 comments

from Asad Zaman

Among the many dimensions I have listed in “New Directions in Macroeconomics”, the most important is the moral dimension. If we take Adam Smith as the founder, economics was born as a branch of moral philosophy. However, modern economists claim that the subject is purely positive and scientific, and makes no value judgments. Before we can discuss moral dimensions of economic theories, we must counter this claim, and establish that, contrary to claims made by economists, the subject is deeply and inherently normative. The level of cognitive dissonance required to maintain that economics is objective and value free is much greater than that required to maintain that the earth is flat. How apparently rational and sane people can hold such a stance is in itself a puzzle. I have attempted to provide an explanation of this puzzle in Section 2 of “Islam’s Gift: An Economy of Spiritual Development”.

Because economists deny their existence, it is necessary to unearth and expose the norms at the foundations of modern economics, in order to create the room for rational discussion of alternatives. In “The Normative Foundations of Scarcity”, I have displayed three major normative assumptions, all of which are required to make scarcity the foundation of economics.  read more

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