Lessons from monetary history: The quality-quantity pendulum

from Asad Zaman and WEA Pedological Blog

In the previous section, we saw how economic theories changed from classical to Keynesian to Monetarist over the course of the 20^th century. These changes were driven by historical events. Taking this historical context into account deepens our understanding of economic theories. This contrasts with conventional methodology of economic textbooks, which treats economic theories as scientific laws, which are universally applicable to all societies. In this section, we describe one of the central lessons which emerges from the study of money over the millennia.

The Battle of Methodologies (Methodenstreit)

In the realm of economic ideas, prevailing theories often align with the interests of powerful classes rather than the pursuit of truth. The late 19th Century witnessed the emergence of a supposedly “scientific” methodology, relying heavily on quantification, data, and mathematics, challenging the traditionally dominant historical and qualitative approach in economics.

By the 1920s, this so-called “scientific” approach triumphed, overshadowing and eventually abandoning the traditional qualitative method. This shift, which deprived economists of deep insights available from history, led to significant loss of understanding.

How to Learn Lessons from History?

Given that historical events are unique, learning from them poses a challenge. However, the process involves a learning-by-doing approach.

Positivism & the loss of meaning

from Asad Zaman and WEA Pedagogy Bog

I recently gave a talk to students of Modern Money and Economics of Sustainability at Torrens University. The video of the talk is here. I have also written up some notes about this talk which clarify some points only sketched briefly in the talk, and provide links to more detailed discussions. 

The following writeup provides some details and background missing from the talk, and also links to related materials:

The transition from a traditional Christianity based society to secular modern society which took place in Europe over the course of the two centuries has been studied by many authors. Radical changes took place in all dimensions: politics, economics, society, education, environment. In this talk, I will focus on a dimension which has not been studied heavily: epistemology, or the theory of knowledge.  An article entitled “Wikipedia: Getting to Philosophy” shows that in 97% of the cases, clicking on the first internal link in any article, and repeating the process, eventually leads to an article categorized as philosophy. That is, all human knowledge is founded on philosophy, even though we are generally unaware of this.

The trigger for change in epistemology was centuries of devastating wars between Christian factions. It became clear to all that Christianity could not provide the basis to build a peaceful society. Hobbes was the first to devise a political science based purely on rational considerations. The Biblical approach of the scholastics was rejected. But this meant that all knowledge had to be rebuilt from the ground up. Two schools of thought emerged. Empiricism sought to build knowledge on the foundation of observations, while Rationalism did so on the basis of logic. In the early twentieth century, the two were combined in a theory of knowledge known as Logical Positivism (LP). To simplify, LP asserted that science led to certain truth. Furthermore, Science, based on observations of external reality, was the only valid source of knowledge.

Brainstorming: negative impact of economics

from Asad Zaman and the WEA Pedagogy Blog

In my previous post (The Religion of Economics), I explained why economic is a religion, even though it claims to be a science. This religion preaches a toxic morality, where the goal of life is maximization of personal pleasure, with no moral or social constraints. Some months ago, I read an article which suggested that we should do a cost/benefit analysis of economic theory itself – how much harm it has caused, versus any benefits that it has brought to mankind – (I tried to search for this review, which references two books which the article reviews, which strongly support the idea that economic theory itself is the cause of great human misery – but I could not find it because I could not recall the name of the author or the article title or the source).

I would like ask for help from readers in identifying, as precisely as possible, how economic theory has caused harm to humanity. Overall, I am thinking of the framing used by Julie Nelson in her article: Poisoning the Well: How Economic Theory Damages the Moral Imagination.

Abstract: Contemporary mainstream economics has widely ‘poisoned the well’ from which people get their ideas about the relationship between economics and ethics. The image of economic life as inherently characterized by self-interest, utility- and profit-maximization, and mechanical controllability has caused many businesspeople, judges, sociologists, philosophers, policymakers, critics of economics, and the public at large to come to tolerate greed and opportunism, or even to expect or encourage them. This essay raises and discusses a number of counterarguments that might be made to the charge that current dominant professional practice is having negative ethical effects, as well as discussing some examples of the harms inflicted in the areas of law, care work, the environment, and ethics itself.

It is this last sentence which is of great interest to me. General critiques of orthodox economics abound, but I am looking for specific real world cases, where policies were adopted, as recommended by economists, and clearly caused a lot of harm.

The Religion of Economics

from Asad Zaman 

Maeshiro (2016) in “The Capitalist Religion and the Production of Idols“, writes that Capital is the God, and Capitalism is the religion of modern society. Gauthier’s review of Nelson’s Economics As Religion states that “economics became the modern theology that replaced traditional theology as the set of doctrines that give meaning to our social reality and hope to our endeavors to improving our lives … (Nelson analyses) the works of the major twentieth century American economists to show how professional economists are equivalent to the priesthood of this religion of economics which justify, disseminate and legitimize in scientific discourse, normative foundations required for a rapidly growing modern economy”. These articles provide numerous additional sources which assert that modern Economics is a religion. Nonetheless, Economists vehemently deny this charge, and argue that their discipline consists purely of positive and descriptive statements about how modern economies function, without any value judgments.  We can achieve substantial clarity about this dispute by studying the history of the origins of economic theory.

Over a century of enormously destructive religious wars in Europe convinced everyone that social theory could not be built on religious foundations. The scholastic approach, building on the Bible, was rejected, and the entire structure of the social sciences was rebuilt from scratch. Because of urgent need, political science was the first of these secular social sciences to emerge. In Religion and the Rise of Capitalism, Tawney describes the replacement of religion by reason as follows: read more

A student among the econ: Seeing through mathemagics

from Asad Zaman

In my article on “Education of an Economist”, I have explained how I gradually came to realize that all I had learnt during my Ph.D. training at Stanford University was false. I would like to make this more specific and concrete, by providing some examples. A leading example is a paper on Power and Taxes which I studied as a graduate student. But, let me start from the beginning.

Leijonhufvud, in his classic “Life Among the Econ” explains how the priestly caste of the Math-Econ is the most admired and revered among the Econ. With a math degree from MIT, I was eager to join the ranks of the Mathematical Economists, the most prestigious among the alternatives facing me. But a few experiences soured me on this idea. I ended up with a degree in Econometrics, which also makes heavy use of mathematics, under the illusion that this may be closer to reality. I learned much later that all the theory I studied at Stanford pertains to a fantasy world created by economists, which has no relationship to the real world. read more

Decolonization: a necessary first step

from Asad Zaman

This is part 3 of a talk on Current Economic Crisis in Pakistan and Solutions, from an Islamic Perspective. A summary of the first two parts is given below. This third part explains that colonization requires the assent of the colonized, which is achieved by an educational system which teaches the inherent superiority of the colonizers, and the inferiority of the colonized. To solve the problems created by colonial institutions meant for extraction of resources, we must first decolonize our minds. In this process, learning to see through economic theories which keep us dependent is a necessary first step.  Read more

Weekend read – Bizarre methodology blinds us to solutions

from Asad Zaman

“A University Economics degree today is more of a lobotomy than an education” – Steve Keen.

The truth-sensing section of the brain is lobotomized by Friedman’s methodology, according to which wildly inaccurate assumptions lead to the most significant theoretical advances. But also, complete omission of power and class struggle makes it impossible to find solutions to our economic problems.

Even though the current economic crisis in Pakistan has a simple cause, and an equally simple solution, policy debate in Pakistan focuses almost entirely on irrelevant red herrings! Why? Because Economic Theory puts blindfolds on our eyes, and makes it impossible to see the problem, or the solutions.  To remove these blindfolds, we must learn to situate economic theories within their historical context. Applying this principle, we study the historical origins of the Washington Consensus policies currently being widely discussed throughout Pakistan, as the solutions to our economic crisis:

Exploiting the South: power & knowledge

from Asad Zaman 

This is the first of a sequence of posts on the current economic crisis in Pakistan. Although the discussion is in the context of Pakistan, all the poor countries in grips of the modern neo-colonial global system face essentially the same problems. The financial basis of the system is outlined by Jason Hickel in Aid-in-Reverse: How the Poor Countries Develop the Rich. He describes how the poor countries receive 1.3 Trillion USD in financial inflows, aid, etc. from the rich. But, the poor transfer 3.3 Trillion USD to the rich countries, essentially preventing any possibility of development of the global South. The financial inflows are really payments to the local power elites (army, bureaucrats, politicians, influential people, and media) as well as infrastructure and weaponry required to maintain the neo-colonial power structures for exploiting the resources, human and otherwise, of the colonized. The purchased power elites act on the behalf of the colonizing powers, and implement policies that impoverish and exploit local resources for the benefit of foreign corporations. But, other than this hard power, soft power in the form of control of media and education, is required to create the assent of the colonized to their own exploitation. Among the most powerful tools within this arsenal are false economic theories, which keep the masses and their university-trained thought leaders engaged in fighting phantom enemies. These economic theories are inherently incapable of recognizing and addressing the real sources of our problems, since history, power, armies, and politics are deliberately excluded from the scope of study. This first part merely explains the simple problem which is at the root of the current economic crisis, and the simple solution that could be implemented, if it was not against the interests of the global and local power structures. read more

Is it Rational to be a Sociopath?

from Asad Zaman

Microeconomics textbooks present the infamous “homo economicus” as an ideal of rational behavior. Those who study actual human behavior – in many different disciplines – have come up with overwhelming empirical evidence that we, homo sapiens, fail to live up to this ideal in many different ways. Unlike the homo economicus, we are not

1. Cold: we let our emotions influence our behavior.
2. Callous: concern for others causes us to share our good fortune with others, instead of keeping everything for ourselves.
3. Cruel: We feel pain for the suffering of others, and sorrow for the extinction of species, or destruction of their habitat, instead of joy at the resulting profits.
4. Calculating: We are not concerned with maximizing our monetary gains, down to the last penny.

The paper “The Empirical Evidence Against Neoclassical Utility Theory: A Review of the Literature” shows how each of these human failings causes us to deviate from the lofty standards of ideal rational behavior. The fact that all four of these characteristics are pejoratives in common parlance suggests that economists’ view of “rationality” does not agree with ordinary language usage of this word. Since the meaning of the word is contested, let us use E-rationality to denote what economists mean by rationality. In ordinary language, we would say that E-rational behavior is sociopathic. This is the framework for the question of the title: is it rational to be a sociopath, as economists claim?  read more

Origins and consequences of US monetary hegemony

from Asad Zaman

The two World Wars in the 20th century depleted the gold stocks of European governments and made a return to the (UK Sterling based) gold standard impossible. This led to the Bretton Woods conference of 1944, where leaders of the world came together to find an alternative, non-gold-based, global trading system. John Maynard Keynes brought a proposal for a symmetric trading system, but it was rejected in favor of the dollar standard, which transferred global hegemony from the UK to the USA. The US had enough gold reserves to guarantee convertibility of the USD into gold at $35 per ounce, and this system worked fairly well until the Vietnam War led to excessive expenditures of dollars and an insufficiency of gold to redeem them.

In 1971, President Nixon renounced the Bretton Woods agreement and de-linked dollars from gold, leading to a world of unbacked currencies with floating exchange rates. The Nixon shock created massive uncertainty about how the world would function with fiat currencies. The Hunt brothers thought the system would collapse, leading to a return to gold and silver. They nearly succeeded in buying up most of the silver in the world – see Speculative Financial Attacks. The US was aware that loss of confidence in unbacked dollars could lead to financial disaster. To prevent this, they engineered a deal with Saudi Arabia to ensure that petroleum would always be sold in dollars, effectively replacing gold backing with petroleum and creating the Petro-Dollar.

This system is hugely favorable to the US, as it can print paper and buy real goods from around the world. All other countries must export to earn dollars and participate in global trade. This effectively creates a financial colonization of the world where all countries must pay tributes to the US in the form of goods. The IMF is there to help countries that fall behind in their payments, but this often leads to deeper debt enslavement. The current global trading system results in immense disparities between American levels of consumption and the rest of the world.

With the decline of US power   read more

Development economics

from Asad Zaman

The prescriptions of Development Economics were applied to generate growth in Pakistan in the 1960s by a group of expert economists from Harvard. As already discussed, these theories focus on the accumulation of capital, rather than the lives of human beings. Pakistani economist Mahbubul-Haq saw through the mathematical formulations to the heart of the strategy proposed for growth. He wrote: “ It is well to recognize that economic growth is a brutal, sordid process. There are no shortcuts to it. The essence of it lies in making the laborer produce more than he is allowed to consume for his immediate needs, and to reinvest the surplus thus obtained.” Despite this clear recognition, he thought that exploiting the poor was necessary to create growth, which would bring long-term benefits to all. Much to his credit, he renounced his earlier views when he saw the bad effects of these economic policies. As the Power=Knowledge theory predicts, these theories were accepted and adopted not because they were true, but because they served the interests of the rich. Mahbubul Haq noted that wealth became concentrated (in the hands of 22 families) and did not “trickle-down.” He wrote that “we were told to take care of our GNP as that would take care of poverty – let us reverse this and take care of poverty as this will take care of our GNP.”  

Modern money and inflation

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.

Weekend read – Four flaws in foundations of statistics

 

from Asad Zaman and the WEA Pedagogy Blog

Rejecting Arbitrary Distributional Assumptions

In the early 20^th 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.

Real statistics: a radical approach

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.

Weekend read – Fisher’s flawed foundations of statistics

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

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. 

More quotes against economics

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

from Asad Zaman

1      THE DILEMMA OF CAUSALITY

Study 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?

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.

Causal explanation of autonomy and invariance of regression relationships

from Asad Zaman

Brief History of Econometrics: Launched in early 20^th 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