Читать книгу The Future of Economics - M. Umer Chapra - Страница 9
ОглавлениеThere are growing numbers who suspect that all is not well in the house economics has built.
(Mark Blaug)1
Man is a moral animal and no political or economic order can long survive except on a moral base.
(Nigel Lawson)2
Conventional economics has undoubtedly made immense progress, particularly after World War II. If one were to evaluate its contribution in terms of the scientific sophistication that it has attained so far, it would perhaps get full marks. Its contribution far outshines that made during any other comparable period in human history. However, while human beings have an interest in the sophistication of a discipline, their greater interest lies in the help that it can provide in solving their problems and realizing the goals that they have set before themselves. So how does conventional economics fare on this criterion?
Conventional economics has put before itself two different sets of goals. One of these is what may be termed positive, and relates to the realization of ‘efficiency’ and ‘equity’ in the allocation and distribution of scarce resources. The other is what may be called normative, and is expressed in terms of the universally-desired socio-economic goals of need-fulfilment, full employment, optimum rate of economic growth, equitable distribution of income and wealth, economic stability, and ecological balance, all of which, in addition to social harmony and the absence of anomie are, in varying degrees, considered indispensable for actualizing human well-being. Both of these set goals aim at serving the individual as well as the social interest in conformity with the worldview that underlies each of them. Nevertheless, the first set has been called positive because of the claim that efficiency and equity can be determined without value judgements, while the second has been called normative because it reflects, to a great extent, society’s vision of ‘what ought to be’.
Whether or not these positive and normative goals are mutually consistent depends on how efficiency and equity are defined. This will become clear as this discussion progresses. It is difficult to say whether conventional economics has been able to realize its positive goals because of the difficulty of defining and measuring both efficiency and equity in a dynamic economy. However, it is generally agreed that even rich industrial countries have been unable to realize all their normative goals simultaneously in spite of the substantial resources at their disposal. If some of these goals are realized, it is at the expense of others. The available evidence seems to suggest that the failure has gradually become more and more pronounced with the passage of time. So what could the reason for this failure be?
CONFLICT BETWEEN GOALS AND WORLDVIEW
There are two possible reasons for this failure: firstly, the inability of conventional economics to suggest appropriate mechanisms for filtering, motivation and restructuring; and secondly, the inability of the society concerned to apply these mechanisms effectively. The question of application, however, acquires significance only if one were satisfied that the suggested mechanisms are appropriate for realizing the normative goals. Is it possible that the mechanisms suggested by conventional economics are not in harmony with its goals? Within the perspective of this book, the answer to this question is in the affirmative.
The reason for this may perhaps be that the goals and the mechanisms of conventional economics have been derived from two different worldviews. The normative goals are the byproduct of a religious worldview that emphasizes the role of belief in God, the accountability of human beings before Him, human brotherhood, and moral values in the allocation and distribution of resources. Even though an effort is made to justify these goals through the use of an economic rationale, their essential origin and justification lies in the religious worldview. The mechanisms for filtering, motivation and restructuring are, however, by-products of the secularist worldview of the Enlightenment movement. It may not, thus, be possible to realize humanitarian goals without having equally humanitarian mechanisms.
Initially, when the secularist paradigm was primarily confined to a small group of academics, the conflict between the religious and the scientific models did not have a significant impact on the economy and society. Religious values continued to dominate and override the impact of the secularist paradigm on the mechanisms employed. However, with the gradual proliferation of the secularist values of the Enlightenment worldview through secular education and the mass media, and the inability of disintegrating families to provide a proper moral upbringing for new generations so as to prevent the decline in their moral orientation, the conflict has tended to become more widespread.
The Enlightenment movement of the seventeenth and eighteenth centuries considered all the revealed truths of religion as “simply figments of the imagination, non-existent, indeed at the bottom priestly inventions designed to keep men ignorant of the ways of Reason and Nature”.3 It denied any role for Revelation in the management of human affairs and placed great emphasis on the ability and power of reason to distinguish right from wrong and to order all aspects of human life. It, thus, deprived society of the morally-oriented filtering, motivating and restructuring mechanisms, which have the potential to effectively complement the role of the market in the allocation and distribution of resources.
However, if Revelation is not accepted as the criterion for ‘right’ and ‘wrong’, ‘desirable’ and ‘undesirable’, ‘just’ and ‘unjust’, then there has to be some other way of determining these. Utilitarianism’s hedonist approach was offered as an alternative. Right and wrong were to be determined on the basis of the measurable criteria of ‘pleasure’ and ‘pain’.4 This approach paved the way for the introduction of the philosophies of social Darwinism, materialism and determinism in economics and other Social Sciences.
Social Darwinism was an extension of the principles of the survival of the fittest and the natural selection of Darwinism to human society. This inadvertently provided tacit justification for the concept of ‘might is right’ in the ordering of human relations and of holding the poor and the downtrodden as totally responsible themselves for their own poverty and misery. The rich and the powerful could thus pacify their consciences and exonerate themselves from any sense of social or moral obligation for the removal of the inadequacies and injustices of the system.
Materialism made wealth, bodily gratifications, and sensuous pleasures the objectives of human endeavour. This served to provide the foundation for today’s consumer culture which has made continually increasing consumption a virtue and which has led to the multiplication of human wants beyond the ability of available resources to satisfy. Given the ethos of this culture, a non-controversial proposition of conventional economics is that more is invariably better than less, and that, accordingly, increased production, greater material wealth, and larger consumption are necessarily good.5 It was not appreciated that material goals may sometimes need to be sacrificed in human society so as to reduce the non-economic costs of greater production and consumption and so as to realize greater equity and social harmony.
Determinism implied that human beings had little control over their own behaviour. Instead, actions were primarily seen as mechanical and automatic responses to external stimuli as in animals (Watson and Skinner), unconscious mental states beyond the individual’s conscious control (Freud), or social and economic conflict (Marx). Determinism, thus, did not merely negate the distinctiveness and complexity of the human self, it also led, in step with social Darwinism, to the repudiation of moral responsibility in individual behaviour. Since the circumstances that controlled the individual’s behaviour were beyond his or her control, the rich or the powerful could not be blamed for what happened to the poor and the downtrodden. This in sharp contrast to the religious worldview which considers all human beings responsible for their own actions and, hence, accountable before God.
The Enlightenment worldview did not immediately lead to either moral decline or to an erosion in the humanitarian values of the religious worldview. It did, however, succeed in driving a wedge between the scientific and the religious models and in giving rise to a number of concepts which are in conflict with humanitarian goals. The three most important concepts which form the pillars of the conventional economics paradigm, are: rational economic man, positivism, and Say’s Law. The meanings and implications of these for economics are briefly discussed below.
Conventional economics is deeply committed to the assumption that individual behaviour is rational. Whilst there may not be any great difficulty in accepting this assumption, there is nevertheless a problem in defining rationality, and, indeed, there are a number of ways of so doing.6 However, once the normative goals of society have been specified, we may not be left with unlimited freedom to do this. Rational behaviour would then automatically become identified with behaviour that is conducive to the realization of these goals. It would then imply that an individual intelligently takes into account all the different factors, economic and non-economic, that affect the realization of these goals and, thereby, his as well as other people’s well-being.
Economics, however, did not do this. Taking into account the well-being of others would have implied constraints on individual behaviour. This did not fit into the secular paradigm of economics and had to be ruled out. Hence, in keeping with the social-Darwinist approach to economics, rationality was equated with the serving of self-interest. This is clear from the depiction of ‘rational economic man’ by practically all writers. They “interpret the drive of self-interest in man as the moral equivalent of the force of gravity in nature”.7 Edgeworth clearly expressed this idea by saying that “the first principle of economics is that every agent is activated only by self-interest”.8 Within this framework, society came to be conceptualized as a mere collection of individuals united through ties of self-interest.
It is, however, possible to serve even self-interest in different ways, economic as well as non-economic, pecuniary as well as non-pecuniary. But, in keeping with its materialist orientation, economics ruled out all non-economic aspects of self-interest and primarily equated rationality with the ‘economic’. Even the ‘economic’ was confined solely to the pecuniary. Economics created the imaginary concept of ‘economic man’, whose “one and only one social responsibility is to increase his profit”.9 Economics, thus, primarily concerned itself with the behaviour of rational economic man who was motivated only by the serving of self-interest by maximizing his wealth and consumption in whatever way he could. All other passions that bring human beings together, such as cooperation, compassion, brotherhood and altruism, whereby people strive for the well-being of others even when it hurts their immediate self-interest, were totally ignored. Thus, what the secularist trapping of economics did was to essentially make the serving of self-interest through the maximization of wealth and consumption the primary device for filtering, motivation and restructuring.
The individual can also serve his self-interest within the constraints of a number of humanitarian goals, the realization of which is considered to be crucial for human well-being. This being the case, then both present and future generations as well as other earthly creatures that coexist with humans, together with material and non-material aspects of life may have to be given due attention. The freedom of the individual would, in this context, be only one of the goals. Once all the desired goals are recognized, then the most rational way to measure positivism may be to look at the progress made in the realization of not just one, but rather all these goals in accordance with their priority in human well-being. All factors that affect individual behaviour and have the potential to contribute to the well-being of all, may have to be taken into account, irrespective of whether they are economic or non-economic, public or private, moral or mundane. Moral and institutional factors complement the material factors that are taken into account by the market mechanism, and thus help in the realization of goals.
Positivism does not, however, accept either the equal importance of other goals or the significance of non-material factors in the realization of these goals. It gives the utmost weight to rational economic man’s freedom to pursue his material self-interest. It argues that every individual is the best judge of his self-interest and should be left free to choose any of the various alternatives that he considers to be in his best interest. He should not be subjected to any constraints, moral or otherwise. This does not, however, take into account the fact that while the individual may be the best judge of his own self-interest, he is not necessarily the best judge of social interest.
Such excessive emphasis on individual freedom led to an anathema regarding value judgements and to the insistence on value-neutrality. Economics was declared to be “entirely neutral between ends”10 and “independent of any particular ethical position or normative judgements”.11 The preferences or subjective valuations of individual members of society were to be taken as given. No judgement could be passed on these in terms of their consistency with normative goals. Consequently, it has become the primary task of economists to describe and analyze ‘what is’ so as to be able to predict what may happen in the future.12 They cannot pass any judgement on ‘what is’, or suggest ‘what ought to be’. They can only discuss the possibility function and not the preference function.
Positivism has become such an integral part of the economics paradigm that it has been treated as non-controversial and generally accepted by the rank and file of the economics profession since the seventeenth century, despite the Neoclassical and Keynesian revolutions.13 This, in turn, has led to a disregard of the role of moral values as a filtering device in the allocation and distribution of resources and to the treatment of tastes, preferences, and socio-economic institutions as exogenous variables. All these, it was argued, required value judgements, which were a matter of subjective choice and therefore untestable. Hence prices and incomes determined by market forces became the primary instruments for determining the allocation and distribution of resources, and have played a predominant role in the descriptive, analytical and predictive functions of economics. It also contributed to the concept of Pareto optimality, which asserts that only that policy is acceptable which makes at least one person better off without making anyone worse off. According to John Rawls, one must never act solely to increase general happiness, if in doing so one makes any person unhappy.14 Since there is hardly any policy which does not make anyone worse off, what, in fact, the absence of value judgements and the concept of Pareto optimality have accomplished is perhaps the paralysis of policy making by leading, in the words of Solo, “to inaction, to non-choice, to drifting”.15
Positivism also became “associated with the belief that any question asked by economics must have an empirically determinable right or wrong answer”.16 If the answer is not empirically determinable, economics should not consider the question. This automatically led to an emphasis on concepts which are measurable in pecuniary or material terms. The Social Science Research Building at the University of Chicago reads: “If you cannot measure, your knowledge is meagre and unsatisfactory.”17 Such an attitude deprived economics of the task of analyzing the impact of social values and institutions on the allocation and distribution of resources18 and of suggesting a programme of social steering to actualize the social vision.
Government Non-Intervention: The Symmetry Between Public and Private Interests
If socially-agreed values were denied any role in filtering, motivation and restructuring, the government could be assigned an important role in the realization of social goals. However Say’s Law,19 which is an important by-product of the application of the laws of Newtonian physics to economics, and which constitutes one of the cornerstones of classical economics, would not allow this. It asserted that, just like the universe, the economy will run perfectly if left to itself. Production will create its own demand and there will be no overproduction or unemployment. Any tendency on the part of the economy to create overproduction or unemployment will be corrected automatically. In this respect ‘Economic laws’ were all powerful and brooked no interference.
This led to the concept of laissez faire, which stands for government non-intervention in the operation of the market. The government could do nothing and had no other option but to abstain from intervention. Market forces would themselves create an ‘order’ and ‘harmony’, and any effort on the part of the government to intervene in the self-adjusting market could not but lead to distortion and inefficiency. The mechanical concept of the universe and of man thus gave rise to a blind faith in the efficacy of market forces.
The seeds for Say’s Law had been laid earlier by Adam Smith’s claim that there was a symmetry between private and public interests. If everyone pursued his or her self-interest, the ‘invisible hand’ of market forces would, through the restraint imposed by competition, promote the interests of the whole of society, thus bringing about a harmony between private and social interests.20 Hence there was no need for the government or anyone else to intervene in the operation of the market. The general equilibrium theory further reinforced this logic by showing mathematically “how the unintended consequences of uncoordinated selfishness result in the most efficient exploitation of scarce resources in the satisfaction of wants.”21
To prove that the market would if left to itself lead to maximum efficiency, it was argued that individuals in their capacity as sovereign consumers, act rationally and try to maximize their utility by buying at the lowest price the goods and services that occupy a higher place on their preference scales. Their preferences are reflected in the market place through their demand or willingness to pay the market price. Individuals, in their capacity as producers, also act rationally and respond ‘passively’ to this demand by producing at the lowest cost whatever will help them maximize their profits. The free interaction of utility-maximizing consumers and profit-maximizing producers under perfectly competitive market conditions determines the market clearing prices for goods and services. These prices (and costs, which are also prices) serve as an impartial, value-neutral filter mechanism and lead to the transfer of resources from one use to another. Thus, without anyone’s conscious effort or intervention, there is the production of that configuration of goods and services which is in maximum harmony with consumer preferences. This configuration is called the Pareto efficient. It is the most ‘efficient’ because it is not possible to improve upon it without making someone worse off. There is perhaps no other concept which has acquired as firm a place in the paradigm of conventional economics as Pareto efficiency.
The word equity is not explicitly mentioned within this framework. However, it is assumed that the configuration of goods and services which is Pareto optimum is also the most ‘equitable’,22 because it reflects the incomes earned by the respective factors of production on the basis of their contribution to the Pareto optimum output and revenue. Friedman very clearly argues that: “However we might wish it otherwise, it simply is not possible to use prices to transmit information and provide an incentive to act on that information without using prices also to affect, even if not completely determine, the distribution of income.”23 Thus, equity also found itself defined in terms of Pareto optimum rather than normative goals. At the point of equilibrium, consumer satisfactions (utilities) are maximized, supplier costs are minimized, and factor earnings (including wages, salaries, rents and profits) are maximized. Market prices, it is thus concluded, determine not only the most ‘efficient’ use of resources but also the most ‘equitable’ distribution of income in a rational and impartial manner without value judgements.
Private and public interests are thus automatically brought into harmony. Questions about whether this configuration satisfies basic human needs and whether the distribution is equitable are improper because such questions cannot be answered without collective value judgements which, unlike market clearing prices, cannot be established impartially. Questions about differentials in wealth holdings are similarly improper because the wealth of individuals largely represents the savings resulting from the market value of their own or their parents’ contributions to output and abstinence from consumption. Hence, there is no need for value judgements or government intervention.
All that needs to be done is to ensure competitive markets to enable prices to reach their equilibrium levels, without any restrictions on sovereign consumers to maximize their utilities by purchasing whatever they desire in keeping with their preferences and ability to pay the price, or on producers to respond to consumer preferences in a way that enables them to maximize their profits. Anything that prevents this from taking place is a distortion and automatically leads to an inefficient and inequitable use of resources. Government intervention may be acceptable only where it is necessary to remove such distortions, to ensure competition and orderly markets, and to offset market failure in the supply of public goods.
The logic of the claimed symmetry between public and private interests thus had the effect of gradually turning eyes away from the social obligations of individuals to the ‘unintended’ social outcome of their actions, and made the market the primary instrument for realizing efficiency and equity in the allocation and distribution of scarce resources. This eliminated the role of all institutional factors, including moral values, and of government. Market-determined prices became the only filtering mechanism, and self-interest the only motivating force. These together would also bring about the needed restructuring in resource use until the most efficient and equitable outcome was attained. Hence the tacit acceptance that competition was sufficient to serve social interest and to bring about harmony in human society.
THE KEYNESIAN CONSENSUS AND ITS BREAKDOWN
The Great Depression clearly established the logical weakness of Say’s Law and the concept of laissez faire. It was evident that market economies were not necessarily able to constantly maintain full employment and prosperity.24 They could rather slump into depression and not automatically rebound to full employment because of market imperfections and rigidities. Nobody had the patience to wait for the long-run because, as Keynes put it, “in the long-run we may all be dead”.25 What Keynes did was to provide a theoretical rationale for this empirical failure. Inadequacy of demand was diagnozed by him to be the cause of depression. This led to the Keynesian consensus in conventional economics and the general acceptance of an important role for the government in the economy through fiscal and monetary policies. Governments intervened to a greater or lesser extent to promote growth and employment and to offset, at least partly, some of the adverse effects of market failure on both efficiency and equity.
The Keynesian consensus had, however, a logical weakness in the same way as Say’s Law. While Say’s Law put the entire burden of goal realization on the market, the Keynesian revolution put the whole burden of correcting the unemployment equilibrium on the government. There was no room even in his thought for the role of values and of family and social solidarity in realizing social goals. The excessive burden on the government generated high rates of fiscal deficits and inflation in the 1970s without significantly redressing the unemployment problem. The Keynesian fiscal remedy was unable to successfully cope with stagflation, or the simultaneous presence of both high rates of inflation and unemployment. This led to a breakdown of the consensus and to a revival of faith in the laissez faire model. If there were any doubts still left about the inefficacy of monetary and fiscal policies, they were shaken by the rational expectations theory.26 It was argued that the rational individual took account of all available information, including expected changes in monetary and fiscal policies, and reacted accordingly. This made government policies ineffective. Intensified calls from both intellectual and political platforms for liberalism, or a return, as near as possible, to the classical model with ‘minimum’ government intervention was the result. This approach presently dominates the thinking and economic policies of not only Western industrial countries but also a substantial part of the Third World and the now-liberalizing Communist countries.27
The breakdown of the Keynesian consensus has, thus, brought back conventional economics to its non-interventionist, neoclassical position. It is now believed that government intervention in the economy through expansionary monetary and fiscal policies cannot be successful in attaining a permanent increase in output and employment. This raises the crucial question of how social goals can be realized if the laissez faire model has failed empirically and government intervention through monetary and fiscal policies is also considered to be ineffective. Conventional economics has no answer to this question. There is hardly any discussion of how and by what process efficiency and equity as conceived within the theoretical construct of Pareto optimum translates into humanitarian goals. It is tacitly assumed that these goals may be ‘ultimately’ realized if the market is allowed to play its role.
Such an assumption is only justifiable if there is only one market equilibrium. However, the undeniable fact is that it is possible to have several equilibria depending on which tastes and preferences based on which values and institutions interact with market forces. Which of these different equilibria would then be called Pareto optimum? Would it be any equilibrium, or would it be the one which is consistent with humanitarian goals? This question is not explicitly addressed. It cannot be because this would require an analysis of all possible equilibria in terms of their relationship with the humanitarian goals, leading ultimately to a point where one of them may have to be chosen because of its being closest to these goals. If this requires a specific behavioural pattern on the part of consumers and firms, and hence a change in existing consumer tastes and preferences and socio-economic institutions, then value judgements and social reform become imperative.
Social reform cannot be entertained in positive economics because of the anathema it presents to value judgements and the commitment it requires to unrestrained individual freedom. Hence, only the ceteris paribus clause was so extensively employed. Tastes and preferences together with values and institutions were assumed to be exogenous and the Pareto optimum became associated with those sets of the same that were extant. It did not matter whether these were, or were not, conducive to the realization of humanitarian goals. It was implicitly assumed that every market equilibrium would be consistent with normative goals. Equilibrium economics thus became “an apologia for existing economic arrangements”28 by leading to the belief that any intervention to change the status quo would necessarily lead to results which were less efficient and less equitable.
What Keynes did was to show that every market equilibrium was not consistent with full employment because of market imperfections and rigidities. He, therefore, proposed the use of fiscal policy to ensure full employment. Keynes was, however, not concerned with the other goals of social policy (need fulfilment, the equitable distribution of income and wealth, ecological balance and social harmony). From his point of view, the prevailing market system appropriately solved the problems of resource allocation and income distribution. It failed only in realizing full employment. He, therefore, specified only a small change in the market system. He did not talk of a change in the attitudes and preferences of individual economic agents. The rational expectations theory, which has now become generally accepted, has shown that monetary and fiscal policies cannot even help realize full employment. The inflation expected by individuals as a result of the policy change would automatically generate the expected inflation, without a permanent reduction in unemployment. The government would not, therefore, be able to accomplish anything in spite of its good intentions.
Even though the Keynesian consensus has broken down in academic circles, the goal of full employment lives on. Nevertheless, conventional economics has so far been unable to formulate an effective strategy that can realize a market equilibrium which is in harmony with this goal as well as the other goals of social policy. Is it possible for a society faced with social turmoil to accept the pessimistic verdict of the rational expectations theory that the government is helpless and can do nothing and that, hence, the only alternative left open for society is to wait until the market is, itself, able to realize the needed equilibrium in the long-run? Will the market be able to do so in the long-term until the tastes and preferences of all agents operating in the market have been changed through social and economic reform?
The silence of conventional economics is understandable, given its epistemological commitment to value-neutrality and the unhindered freedom it places on individuals to pursue their self-interest. However, the realization of goals of social policy is important and the market may not, itself, be able to help realize these goals with minimum government intervention unless certain background conditions are satisfied. The most indispensable of these conditions include: (a) harmony between individual preferences and social interest; (b) equal distribution of income and wealth; (c) reflection of the urgency of wants by prices; and (d) perfect competition.
Adam Smith assumed that condition (a) was automatically satisfied in a competitive free-market economy. This assumption has become the bedrock of the economics paradigm. However, while there is undoubtedly a harmony between individual preferences and social interests in some cases, there is also a conflict in other cases. It is the existence of this conflict which tends to make the realization of normative goals difficult unless the conflict is removed. This difficulty may be better appreciated if one were to examine the need for reducing domestic absorption (aggregate consumption and investment by both the public and the private sectors) to remove the macroeconomic imbalances that a number of countries are now encountering. If the effect on normative goals was to be disregarded, then the market strategy may, perhaps, be the most effective way of reducing domestic absorption. However, given the high levels of unemployment which prevail, it is not necessarily possible to satisfy the imperative of full employment without accelerating investment and growth.
If absorption, however, is to be reduced in a way that investment does not only not decline but rather rise, then consumption may be the primary component of domestic absorption that has to be reduced. Moreover, if the goal of need-fulfilment is not to be compromised, then it may not be desirable to reduce the consumption of all goods and services. It could be argued that the social interest may be better served if the consumption of luxuries, status symbols, and other consumer goods that do not necessarily fulfil a need or reduce a hardship were reduced. However, such a distinction between different goods on the basis of normative goals is not possible or acceptable within the paradigm of conventional economics, for it does not allow the passing of value judgements on individual preferences and relies primarily on choice through the market to determine those individual preferences that may or may not be satisfied.
It is not certain whether choice through the market necessarily helps reduce the different components of domestic absorption in a manner that conforms with normative goals. The market strategy would rely primarily on a rise in prices, interest rates, and taxes to the exclusion of all other means, and in particular socio-economic institutions based on value judgements. A rise in prices may not help because, while the rich may be able to afford whatever they wish at the higher prices, the real income of the poor may be further squeezed and their well-being suffer. Primary reliance on prices may thus shift a significant part of the burden of reducing absorption onto the poor.
Similarly, a rise in interest rates does not necessarily help reduce absorption in the manner desired. Higher interest rates do not of themselves reduce the luxury consumption of the rich or the defence and unproductive outlays of the government. They may, however, adversely affect the well-being of the poor. They may also tend to jeopardize the commitment of funds for long-term productive investments, while not curbing short-term speculative sprees in the commodity, stock, and foreign exchange markets. This may hurt the overall, long-run performance of the economy. Even the imposition of taxes on luxuries and status symbols to internalize social priorities in the price system may have to be ruled out, because these involve interpersonal utility comparisons and value judgements. Such taxes also violate the condition of Pareto optimality by making the rich worse off through the payment of more than the market-determined price for such goods; something that they would prefer not to do as ‘free’ individuals.
Likewise, one could argue that preventing the pollution of a country’s rivers is in the interest of social well-being. The market paradigm, however, leads one to argue that pollution is primarily a consequence of the misallocation of resources that results from the failure of the market brought about by the divergence between private and social costs. However, any measure to internalize the externality (making the social cost of pollution enter private costs) not only requires value judgements but also violates the condition of Pareto optimality by making the consumers and producers of that product worse off through a higher price and lower profit even though it makes society as a whole better off. If social costs were to be entered into private costs in this case by means of government intervention, then why should not the social costs resulting from lack of need-fulfilment, unemployment, inequitable distribution, and economic instability also be taken into account?
Satisfaction of condition (b), the equal distribution of income and wealth, gives all consumers an equal weight in influencing the decision-making process of the market. Producers, assumed as passive suppliers, automatically fall into line. Thus, given that everyone would give priority to need-fulfilment, there would be no distortion in resource allocation against need-fulfilment.29 However, since there are substantial inequalities in income and wealth, and since the rich enjoy far greater access to credit, they have the ability to buy whatever they wish at the prevailing prices. Primary reliance on prices does not automatically create any significant dent in their demand for status symbols and other inessential and unproductive goods and services. They may divert scarce national resources, by the sheer weight of their votes, into products which tend to command lower priority on a social preference scale.
The value-neutral price system is not even concerned with how many votes an individual has and how he uses them. It evaluates the urgency of wants of different consumers on the basis of their ability to pay the price. However, although the urgency for milk may be the same for all children, irrespective of whether they are poor or rich, the number of dollar votes that a poor family is able to cast for milk is not the same as those that a rich family is able to cast for luxuries and status symbols. If the ability to pay prices does not necessarily reflect the urgency of wants, condition (c) remains unsatisfied. Hence Arthur Okun has rightly observed that markets tend to “award prizes that allow the big winners to feed their pets better than the losers can feed their children.”30 Such a result may be acceptable within the social Darwinist principle of ‘might is right’, but it is certainly not tolerable within the framework of humanitarian goals.
Coming now to condition (d), it is well-recognized that even though perfectly competitive markets31 are a theoretical construct of great analytical value, they constitute an unrealized dream in the real world, and are likely to remain so in the future. The innumerable imperfections that exist in the market thwart the efficient operation of market forces and produce deviations from ideally competitive marginal cost pricing, thus leading to prices that do not reflect real costs or benefits. Hence, while prices may not, by themselves, be capable of bringing about a socially-desired allocation and distribution of resources, they may be less capable of doing so if they do not even reflect real costs and benefits.
Since no real world market is likely to satisfy the background conditions even approximately,32 there is a considerable distortion in the expression of priorities in the market place.33 This introduces a built-in bias against the realization of both efficiency and equity, as defined earlier in terms of normative goals, if reliance is placed primarily on prices for the allocation and distribution of resources.
THE INCOMPLETE SCIENTIFIC REVOLUTION
One may argue that there must be something wrong in the above logic of built-in bias because the normative goals have been actualized, at least partially, in a number of societies where conventional economics rules the roost. This for a number of reasons. Firstly, disillusionment with the Church in Western societies did not necessarily lead to the abandonment of moral values. These have survived, as indicated earlier, and ensured a certain degree of moral integrity. Without such integrity the market system may well not have worked – property rights may not have been enforced, justice may not have been realized, and cooperation and mutually profitable exchange between members of society could have been adversely affected, thus frustrating development.34 Secondly, conventional economics has, in reality, never been truly positive. It has also been normative. Economists have made value judgements as well as policy recommendations in spite of the supposedly value-neutral stance of their discipline. This possibly because, as Koopmans has put it, “scratch an economist and you will find a moralist underneath”.35 In other words, it is not possible for economists to uphold humanitarian values in their personal lives while being unaffected by them in their professional lives. Thirdly, individuals have not always resorted to self-interested behaviour, they have also been altruistic. Even though Western societies have gradually moved towards greater hedonism, the transformation has not been complete. Moral values and social taboos have continued to some extent to temper the hedonistic drive and may perhaps continue to do so even in the future. Fourthly, because of democracy, there has been pressure on governments to remove inequities and to promote social interest. They have, therefore, formulated laws to protect property rights, to ensure justice and fair play, to provide a social security net, and to improve labour conditions. Such laws and policies could not have been possible without a concept of what is right and, therefore, what is desirable.
Conventional economics has, nevertheless, continued to cling to its value-neutral stance. This has, besides exposing economists to a position of conflict between their personal and professional paradigms, introduced an inconsistency between its two major branches – microeconomics and macroeconomics. There is, on the one hand, excessive emphasis in microeconomics on the maximization of wealth, bodily gratifications and sensual pleasures, individual freedom, and value neutrality, in keeping with its secularist worldview. While this emphasis has led to the treatment of choice through the market as the only acceptable strategy for the allocation and distribution of resources, it has also led to the assumption that the market invariably acts to harmonize the interests of all human beings. Hence, every competitive equilibrium is considered to be a Pareto optimum and is accepted as both ‘efficient’ and ‘equitable’. There is, on the other hand, discussion of the humanitarian goals, the acceptance of which automatically establishes social priorities. Goals may not be realized unless scarce resources are used in harmony with these priorities. The microeconomic principles of the unhindered pursuit of self-interest, unlimited individual freedom of choice, and value neutrality may not necessarily be consistent with such priorities.
This implies that the “scientific revolution”, using Kuhn’s terminology,36 brought about by the shift from a religious to a secularist paradigm was not complete. While the shift was attained in microeconomics through the assertion of value-neutrality and unlimited individual freedom to pursue material self-interest, the shift did not take place in macroeconomics. It was not possible to give up allegiance to the humanitarian goals of the religious paradigm in favour of the social Darwinist goals of the secularist paradigm in a Christian or any other religious society committed to moral values and the well-being of all. This conflict did not become clear until the development of macroeconomics took place as a result of the Keynesian revolution.
This incomplete scientific revolution has led to the absence of a clear link between microeconomics and macroeconomics. Howitt has, therefore, rightly remarked that “the lack of a clear link between macroeconomics and microeconomics has long been a source of discontent among economists ... Countless students and practitioners alike have complained of the schizophrenic nature of a discipline whose two major branches project such radically different views of the world.”37 Lucas and Sargent have likewise pointed out that “since its inception, macroeconomics has been criticized for its lack of foundations in microeconomic and general equilibrium theory.”38 Arrow also considers the absence of this link as “one of the major scandals of current price theory”.39 In other words, if microeconomics is now rightly conceived, then macroeconomics should not be concerned with policy issues like full employment, need-fulfilment, and equitable distribution. The neoclassical approach of government non-intervention would then be correct. However, if humanitarian goals are to be served, then microeconomics is not built on a proper foundation. In a market economy, where the government’s role is expected to be limited, the goals hang in the air without any logistic support if microeconomic analysis fails to address the question of goal-realization.
Microeconomic analysis based on excessive individual freedom is concerned with efficiency in the Pareto sense but not in the realization of the macroeconomic goals of the humanitarian religious worldview, which requires the reining in of self-interest. Moral values are capable of helping in this task. They are tuned to the creation of social harmony by reducing the gulf between private interest and social interest and promoting the use of scarce resources in conformity with the needs of goal realization. The market is by itself unable to do this in a value-neutral environment, particularly in situations where there is a conflict between self-interest and social interest. The market cannot discriminate between the various uses of resources on the basis of their contribution to normative goals. It needs to be complemented by moral values which help orient individual preferences in harmony with humanitarian goals. Such an orientation may be difficult to attain without individual and social reform in conformity with moral values.
Keynes concentrated only on government fiscal policy. The rational expectations theory is perhaps right in drawing the conclusion that the reaction of individuals to government fiscal policy in anticipation of inflation may go a long way in generating the expected inflation and frustrating the realization of full employment. This conclusion would, however, be true only if primary reliance is placed on increased government spending, and individual behaviour continues to be in conflict with social goals. The enlarged budgetary deficit would then join hands with the consumer culture in the private sector to contribute to excessive claims on resources and stagflation.40 Fiscal policy appeared as the only solution to Keynes because change in individual behaviour and tastes and preferences in conformity with social goals, which moral values help bring about, had to be ruled out in a secularist paradigm.
Hobbes rightly argued in his famous Leviathan (1651) that self-interest knew no bounds and could push man into the greatest of excess if he strove to satisfy it. The only way to prevent him from doing so would be to make him submit to an absolute authority.41 Within the religious worldview, such authority cannot be given to human beings. Quite simply because they tend to misuse it for their own self-interest. The experience of totalitarian states has amply proved this point. Only the Supreme Being, Who has created human beings, Who knows best what is in their overall interest, and Who has no personal axe to grind, could exercise such authority in the interest of all. He has done so by sending His messengers and providing a morally-oriented worldview. Injection of this worldview into conventional economics in place of its secularist Enlightenment worldview is, therefore, indispensable.
Positive economics and normative goals are, hence, mutually inconsistent and may not be capable of coexisting harmoniously in the same analytical framework, or what Lakatos calls, “scientific research programme”.42 What conventional economics should have done is to base its microeconomics on the same religious worldview from which its macroeconomic goals have been derived so that there is harmony between the worldviews of its two major branches of study. This would have helped discussions on individual and firm behaviour that is consistent with these goals and could have enabled a strategy to bring this about.
Instead of doing this, conventional economics adopted the easier but unrealistic course of shying away from making value judgements and giving advice. A number of economists, among them Senior and the younger Mill, ruled out the giving of advice about practical problems as a function of economics, because this would require not only value judgements but also the non-economic elements of other Social Sciences.43 Giving advice based on inherently subjective and religious norms was declared outside the scope of a scientific discipline. Hence, Robbins warned the profession against recommending a particular course of action.44 The aversion to giving advice, along with the assumption that goals would automatically be realized, has unwittingly confined the method of economics to just explanation and prediction, devoid of prescription.
Positivists and operationalists like Paul Samuelson emphasize that the role of economics is to describe and explain the economic phenomena by means of testable or refutable hypotheses.45 In Samuelson’s own words: “a description (equational or otherwise) that works to describe well a wide range of observable reality is all the ‘explanation’ we can get (or need desire) here on earth ... An explanation, as used legitimately in science, is a better kind of description and not something that ultimately goes beyond description.”46 He does not show what it is that “works to describe well”. Could it be anything other than its relationship with the normative goals and their realization as long as these goals continue to be adopted by economics?
Instrumentalists like Milton Friedman emphasize that the primary purpose of economics is to predict. This raises the question of whether it is possible to make dependable predictions when so many of its epistemological assumptions are so grossly unrealistic. Friedman came to the defence of these assumptions with his controversial answer that it is not only unnecessary for assumptions to be realistic, it is also a positive advantage if they are not: “to be important ... a hypothesis must be descriptively false in its assumptions.” He further argues that “the only relevant test of the validity of a hypothesis is comparison of its predictions with experience.”47
But the problem that the instrumentalists face is that unless all relevant social, economic and political variables are taken into account, predictions may turn out to be untrue most of the time. Is this acceptable? Economists, however, have a way out of this dilemma whenever their prediction is falsified. All predictions are subject to the ceteris paribus clause, and they can always claim, without any compunction, that the ceteris paribus conditions were not satisfied. The undeniable fact is that the world economy has been subject to such great instability over the last two decades that it has become almost impossible to make reliable predictions and the predictive record of economics has been uninspiring.48 If prediction is considered to be the primary function of economics, and predictions have in general turned out to be inaccurate, then what has economics achieved? Just professional sophistication! Does this not imply that economics should take into account at least the major non-economic factors that adversely affect its predictions or frustrate the realization of its humanitarian goals?
Even if analysis and prediction are accepted as the primary goals of economic method, they need to have proper direction if they are to be effective. The goal of actualizing the socially-agreed humanitarian goals could help provide such a direction and save economics from moving aimlessly in any conceivable direction. The political decision-maker, whose responsibility it is to take decisions, is not interested in knowing just ‘what is’, as described and analyzed by the economist. He is more interested in fulfilling his commitments to the electorate whom he periodically has to face for votes. These commitments are related to the humanitarian goals which concern the realm of ‘what ought to be’. Since resources are limited, he would like to get advice on the appropriate strategy for realizing the promised goals. He may not be able to work this out himself from the ‘is’ as described, analyzed, and predicted by the economist. If economics does not come to his help, its attractiveness as a discipline for solving socio-economic and political problems declines. Is it, therefore, possible for economists to live in human society and yet refrain from giving such advice?
The most desirable task of economics may, therefore, be to focus on the realization of humanitarian goals and the policy measures needed for this purpose. This would enable it to concentrate on the task of establishing the relationship between its humanitarian goals and the different configurations of resource allocations and distributions with a view to demonstrating the configuration which is most conducive to goal realization. This would contribute, after being tested against empirical evidence, to the development of theory, particularly microeconomic theory, and in turn help evolve an effective strategy for the necessary socio-economic change to solve the problems faced by human society.
BREAKDOWN OF FAMILY AND SOCIAL SOLIDARITY
While excessive emphasis on the serving of self-interest did lead to the accelerated growth of Western economies, it did not help realize the social vision of actualizing all the normative goals. It also yielded a sour fruit in the form of what Fukuyama calls “the great disruption” in his recent book, The End of Order (1997). This refers to the breakdown of the family. While social interest was safeguarded in the economy to some extent by competition as well as the welfare state, there was nothing to safeguard the integrity of the family when the serving of self-interest became the dominant social philosophy. Family is an institution which works more effectively when all members are loyal to each other and willing to sacrifice their self-interest for the sake of others. The upbringing of children, in particular, requires a great deal of sacrifice on the part of parents. This sacrifice may be a loss in hedonist terms, but in reality it serves the self-interest of all by promoting greater love and affection, cooperation, harmony, and mental peace.
The market mentality of serving self-interest has, however, been injected into the family as well, and the result is that parents are not able to get along with each other. If the cement of mutual sacrifice and loving care is not there, why should they stay together or be loyal to each other. There is a rise in sexual promiscuity, divorce and single-parent families, leading to the emotional, spiritual and material suffering of children. Moreover, even while parents are together, the children may not get the kind of care that they need if the parents are not willing to sacrifice some of their pleasures and material interests for the sake of their children’s proper upbringing.
If the future generation does not get the kind of care and upbringing that an achieving civilization requires, there is bound to be a decline in the quality of human beings and a breakdown in social control. Juvenile delinquency and anomie may all rise. This may become further exacerbated when a significant proportion of the population is caught in a vicious circle of poverty, live in the decayed hearts of major cities, and become prisoners of ghetto pathology, with teenage pregnancy, fatherless households, chronic unemployment, crime and drug use. It may not be possible to solve these problems by making cosmetic changes here and there. It may be necessary to create a caring society – a society where there is justice and brotherhood, and where everyone is willing to make sacrifices for the well-being of others. Is it possible to do this without strengthening the family, the institution that is responsible for the upbringing of children who will become the human input of the market, the society and the state in the future, and thereby constitute the foundation of civilization? Can a civilization prevent its decline once the quality of human beings degenerates, crime and anomie increase, and social solidarity weakens? What this clearly brings into focus is the dire need to create a balance between the material and spiritual pursuits of life by reducing the emphasis on serving self-interest and maximizing wealth and consumption. Schweitzer is absolutely right when he emphasizes that: “If the ethical foundation is lacking, then civilization collapses even when in other directions creative and other intellectual forces of the strongest nature are at work.”49
When welfare economics was first developed in the 1930s, its very name initially kindled hope.50 Prefixing the word ‘welfare’ before economics gave the impression that economics may now explicitly become normative in nature, indicate the kind of well-being that was desired, and recommend policies for actualizing that kind of well-being. However, this hope has proved to be misplaced. Welfare economics could not get rid of the secular trappings of conventional economics. Welfare became defined in terms of the individual’s self-interested preferences with hardly any room for altruism51 or direct interest in the well-being of all. It chose to be as wertfreiheit or free of value judgements as its ‘positive’ counterpart. Consequently, it has become Paretian in outlook and a number of positive economic concepts appear in subtly different guises in both positive and welfare economics.52
A number of economists53 have, therefore, attacked the wertfreiheit approach of welfare economics. Blaug has rightly pointed out that “to speak of positive welfare economics is to revel in paradoxical language”.54 Myrdal, who made the concept of value-impregnated Social Science one of the major themes of his lifetime’s work, asserted that the economist should make value judgements but should declare them boldly at the outset of the analysis: “There is nothing wrong, per se, with value-loaded concepts if they are clearly defined in terms of explicitly stated value premises.”55
What is needed is a welfare economics that defines human well-being not in the value neutral Pareto optimal sense but rather in a way that is consistent with humanitarian goals and which also shows how such well-being can be realized within the constraint of scarce resources, without creating macroeconomic and ecological imbalances. It may not be able to accomplish this task if it insists on maintaining its anathema to value judgements and the positive role of government even when both of these are found to be indispensable complements to the efficient and equitable operation of the market system. It may also have to relax its insistence on taking into account only economic variables even though non-economic and historical variables may be of equal importance.
If economics is unable to gear itself to the task of contributing to the realization of humanitarian goals, it faces the danger of becoming marginalized and atrophied. This danger has been perceived by economists during the entire history of conventional economics and articulated by people like Sismondi (1773–1842), Carlyle (1795–1881), Ruskin (1819–1900), Hobson (1858–1940), Tawney (1880–1962), Schumacher (1891–1971), and Boulding (1910–93). They and many other past and present economists have questioned, and are increasingly questioning the accepted wisdom of neoclassical economics.56 They are stepping out of the ivory tower of their science to explore the territory that lies beyond.
Some economists have even emphasized the need for a new paradigm.57 This is a reflection of the growing realization that reason has its own limitations and the high place given to it by the Enlightenment movement needs to be brought down to a more realistic level, and that positivism and empiricism are not capable of creating any kind of normative knowledge.58 Warnock has, thus, rightly observed that, “to dissent from rationalism as a philosophical doctrine is certainly not to disparage reason; the man who values, and shows that he values reason is not he who merely pitches reason’s claims exceptionally high but, rather, he who attempts, by painstaking reasoning, to determine how high those claims may justifiably be pitched.”59 However, the form that the new paradigm might take is as yet incompletely articulated.60 The new paradigm may, most probably, be less hostile towards religion than was the Enlightenment movement. The editors of Religion in Contemporary Europe admit that they are seeing the beginning of the end of 200 years of hostility towards religion.61
It is also being increasingly recognized that self-interest and competition do not necessarily constitute the main driving forces behind human action. The role of altruism, cooperation, moral values, and a host of social, economic and political institutions in moulding preferences and guiding action in human society are also being emphasized. Need-fulfilment and socio-economic justice are likewise receiving due recognition. The development of different schools which challenge the worldview and method of conventional economics has created a silver lining in its clouds. All these schools are, however, closely related, the difference between them being primarily in their degree of emphasis.
One such School is that of Grant Economics which asserts that altruistic behaviour is not necessarily an aberration from rationality.62 It argues that equating rational behaviour with only self-interested behaviour is unrealistic. According to Hahn: “Economics probably made a mistake when it adopted the nomenclature of ‘rational’ when all it meant is correct calculations and an orderly personality.”63 It is also argued that unrealistic assumptions need not necessarily yield correct theory in spite of Friedman’s assertion to the contrary. It may be more appropriate to state that, if the function of economic theory is to yield reliable predictions about the future course of events, then the assumption of rational behaviour within the framework of both altruism and self-interest may probably yield more meaningful predictions. Hence the ‘Boulding optimum’ has been proposed as an alternative to the Pareto optimum, “bringing within the scope of economic analysis a human flair assumed away in the name of value-free science.”64
A second School of thought is that of the need-based Humanistic Economics designed to “promote human welfare by recognizing and integrating the full range of basic human values.”65 Instead of basing itself on the old psychology of utilitarianism, which emphasized wants and wealth, it looks to humanistic psychology and emphasizes need satisfaction and human development to move towards what Abraham Maslow calls ‘self-realization’ or ‘self-actualization’.66 Consequently, it takes into consideration all human needs, irrespective of whether they are physiological (food, clothing, shelter), psychological (safety, security, love, sense of self-worth), social (belongingness), or moral (truth, justice, meaningfulness).
A third School is that of Social Economics which involves a “reformulation of economic theory in the mould of ethical considerations”.67 Commitment to the imperative of value neutrality, the sacred ideal of the Enlightenment scientists bequeathed by economists, is here considered as both untenable and undesirable – untenable because scientific inquiry is based on assumptions which tacitly involve value judgements; undesirable because scientific inquiry cannot avoid addressing questions of public goals and social priorities in resource allocation. Any discipline committed to value neutrality cannot succeed in evaluating policies and recommendations for public choice. Such an evaluation necessarily involves value judgements. Hence, according to Sen, “the distancing of economics from ethics has impoverished Welfare Economics and also weakened the basis of a good deal of descriptive and predictive economics.” His conclusion is that economics “can be made more productive by paying greater and more explicit attention to ethical considerations that shaped human behaviour and judgement.”68 Hausman and McPherson have also concluded in their survey article in the Journal of Economic Literature on ‘Economics and Contemporary Moral Philosophy’ that: “An economy that is engaged actively and self-critically with the moral aspects of its subject matter cannot help but be more interesting, more illuminating and ultimately more useful than one that tries not to be.”69
A fourth School is that of Institutional Economics, which argues that human behaviour is influenced by a number of interrelated social, economic, political and religious institutions that define the way individuals are expected to behave. Organizations act as agents of change by making individuals behave in the desired manner through changes in benefits and costs. This School carries great promise because it can help explain how changes in institutions over time influence the present and the future and why some economies perform better than others. It can also help explain cooperation and coordination and a number of other behaviour patterns in human society which neoclassical economics is unable to do by concentrating primarily on self-interest and competition. These possibilities have gradually raised the conceptual and practical importance of studying the role of institutions in human society.
The problem however is how to derive values which command wide acceptance and which are observed with a sense of moral obligation such that anyone who violates them is censured. Can conventional economics help bring about such a consensus? Probably not. “Social morality,” as Schadwick has aptly observed, “depends on agreed standards, upon a consensus which is received as so axiomatic that it hardly ought to be discussed”, and that, “except in the case of a small number of exceptional groups of people morality never had been separated from religion in the entire history of the human race.”70 Utilitarianism and social contract theories do not carry the potential of providing values which everyone accepts as given and which no one challenges. Even Social Economics cannot be helpful, in spite of its genuine emphasis on values, because it is a “highly pluralistic discipline inspired and enriched by several often radically different worldviews, Schumpeterian visions, and at times even quite antagonistic social doctrines.”71 Conflict of views and interests may lead to differences of opinion which may be difficult to resolve. No wonder Minsky remarked: “There is no consensus on what we ought to do.”72
Decline in the sanctity of ‘self-interest’ and ‘economic man’ and the emphasis on need fulfilment and value judgements are, nevertheless, welcome developments. They show that man is not necessarily condemned to living with inequities. He is capable of rising to the occasion, of analyzing his problems, and of knowing what is wrong. However, what is not so easy is the remedy. It does not lie in a patchwork of cosmetic changes. The remedy lies in reorganizing the whole of society and the economic system in such a way that, on the one hand, there is a transformation of the individual from the economic man to a morally-conscious human being who is willing to live up to the demands of brotherhood and socio-economic justice and, on the other hand, a restructuring of the entire economy in such a way that needs are fulfilled without generating imbalances, and inequalities of income and wealth are not only not generated but also substantially reduced.
Even though the revival of emphasis on values and institutions is laudable, their introduction into conventional economics is bound to be an uphill task. This because there is, as Galbraith has pointed out, “the vested intellectual commitment to established belief,” which views economics as a science and sets “the standard of intellectual precision” by the hard sciences.73 Nevertheless, there is no room for pessimism. In a recent report given by John Hey to the Council of the Royal Economic Society after ten years as Managing Editor of The Economic Journal, he lamented that “few economists ask themselves what are the crucial problems facing society. If they did so, they might produce more relevant material.”74 This enables one to look forward to a future when finding solutions to crucial problems faced by mankind may be considered an important task of economics. Once this has happened then there may also be a realization that there are also non-economic and non-market ways of solving them. It may not then be taboo to inject the moral, psychological, social, political and historical dimensions into economics.
THE RELEVANCE OF ISLAMIC ECONOMICS
This brings us to a discussion of the paradigm, goals and method of Islamic Economics. This need not give anyone the impression that the attempt is to demolish the good and valuable analytical work done by conventional economics over more than a hundred years. It would be difficult not to agree with Blaug when he says that: “any methodological prescription that amounts to wiping clean the entire slate of received economics and to starting all over again from scratch may be dismissed out of hand as self-defeating.”75 The historical record of Muslims shows a great deal of realism in this respect. They borrowed from other cultures whatever they found to be useful and in harmony with their own values, and they did whatever they could to improve and build upon it. The effort of Islamic Economics would be to give the realization of humanitarian goals a prominent place in its paradigm and to define efficiency and equity in terms of these goals. It would also inject values and institutions, along with major non-economic variables and a historical dimension, into the analysis developed by conventional economics so as to better understand the reasons for the inability of Muslims to realize their desired goals. It would not shy away from making policy recommendations to realize these goals. A number of economists are doing exactly the same even in the West. Islamic Economics cannot afford not to benefit from all these efforts.
The question then is, why introduce the prefix ‘Islamic’ before economics? The answer being that the chances of creating a consensus in the Muslim world are greater if the discussion takes place within the framework of the Islamic worldview. Socio-economic justice is such an indispensable goal of Islam and yet so markedly missing in the present-day Muslim world that there is not much time for the luxury of a prolonged intellectual debate if the prevailing social and political turmoil is seen as needing reduction. A consensus needs to be reached as soon as possible, and a discussion taking place within the framework of the agreed principles of Islam will perhaps take much less time to crystallize than that within the framework of secularist and value-free economics. If conventional economics also progresses more rapidly in the direction of shedding its secularism and value-neutrality and injecting moral values and justice into its analysis, then there might ultimately be a convergence between the two. The prefix may then lose its significance. At that stage mankind would be closer to the goals of ‘unity’ of mankind and human brotherhood, which Islam stands committed to actualize because of their being natural corollaries between the Islamic concepts of Tawḥīd (Unity of God) and khilāfah (vicegerency of man).
Notes
1. Blaug, 1980, p. xiii.
2. Lawson, 1995, p. 35.
3. Brinton, 1967, p. 520.
4. Miller, 1962, pp. 230–1; see also Russell, 1945, pp. 773–82.
5. Alan Blinder has rightly identified the three non-controversial propositions of conventional economics as:
(a) more is better than less;
(b) resources are scarce;
(c) higher productivity is better than lower productivity (Blinder, 1987, pp. 15–17).
6. Sen, 1987, pp. 11–14.
7. Myers, 1983, p. 4.
8. Edgeworth, 1881, p. 16.
9. Friedman, 1972, p. 133.
10. Robbins, 1935, p. 240.
11. Friedman, 1953.
12. There is a difference of opinion among economists on the goal of the economic method. Positivists and operationalists, like Samuelson, emphasize that the role of economics is only to describe. Logical empiricists, however, insist that explanation is the goal of economics. By contrast, instrumentalists, like Friedman, emphasize that prediction is the primary function of economics (see Blaug, 1980; Caldwell, 1982). Since I do not wish to enter into this controversy in this brief paper, I have mentioned all three approaches in the text. There is another goal, persuasion, which has also been emphasized (McCloskey, 1986). This, however, does not differ from explaining and predicting because it is generally not possible to persuade without convincing explanation and reliable prediction. The goal of persuasion has not, therefore, been discussed in this book.
13. Routh, 1989, p. 19.
14. Rawls, 1958.
15. Solo, 1981, p. 38; see also Sen, 1987, p. 32.
16. Colander, 1992, p. 113.
17. Cited by Kuhn, 1961, p. 161.
18. Blaug, 1980, p. 149.
19. Named after Jean Baptiste Say (1767–1832).
20. Smith (1723–90), 1937, p. 423.
21. Rosenberg, 1992, p. 219; see also Blackhouse, 1994, p. 13.
22. A number of economists may hesitate to accept this view. It is, however, a logical outcome of the belief in the efficacy of market forces, and economists like J.B. Clark felt that factor incomes in the real world closely approximated the marginal product and its value (see Stigler, 1941).
23. Milton and Rose Friedman, 1980, p. 23.
24. Klein, 1954, p. 90.
25. Keynes, 1924, p. 88. This book is Volume IV of Keynes, 1972.
26. Lucas did more than any other economist to undermine confidence in the government’s ability to increase employment and output growth with expansionary monetary and fiscal policies. See, in particular, Lucas, 1973 and 1976; Mankiw, 1990.
27. There seems to be a change once again in the direction of the wind as reflected in the World Bank’s call for ‘effective’ and ‘good’ government in its 1997 World Development Report: The State in a Changing World.
28. Hahn, 1970.
29. Samuelson has rightly indicated that “the Invisible Hand will only maximize total social utility provided the state intervenes so as to make the initial distribution of dollar votes ethically proper “ (1966, p. 1410; italics in the original).
30. Okun, 1975, p. 11.
31. Perfectly competitive markets are said to prevail if there are many buyers, many sellers, no barriers to entry, and perfect information about the present and the future. These conditions are not satisfied anywhere.
32. Brittan, 1985, p. 16.
33. Tawney, 1948, p. 12.
34. See North, 1990; Hausman and McPherson, 1993; Rodney Wilson, 1997.
35. Koopmans, 1969, cited by M. Ali Khan in Z. Ahmed et al., Fiscal Policy ..., 1983, p. 243.
36. Kuhn, 1970.
37. Peter Howitt, 1987, p. 273.
38. Lucas and Sargent, 1979, p. 4.
39. Arrow, 1967, p. 734. See also, Peter Howitt, 1987, p. 273.
40. See Chapter 3 on “The Crisis of the Welfare State” in Chapra, 1992, pp. 113–46.
41. Cited by Myers, 1983, pp. 2–3.
42. Lakatos, 1974.
43. Hutchinson, 1964, pp. 29–31.
44. Blaug, 1980, p. 150.
45. See Mark Blaug, 1980; Bruce Caldwell, 1982.
46. Samuelson, 1972, pp. 765–6; also 1966, p. 1778.
47. Friedman, 1953, p. 14. He also states that: “Truly important and significant hypotheses will be found to have ‘assumptions’ that are wildly inaccurate descriptive representations of reality, and in general, the more significant the theory, the more unrealistic the assumptions (in this sense).” (See also Hahn’s view in Hahn and Hollis, 1979, p. 12.)
48. The modern Austrian School, therefore, argues that “prediction is absolutely impossible in a subject like economics because economic behaviour, being forward-looking, is inherently unpredictable” (Blaug, 1980, pp. 259–60).
49. Schweitzer, 1949, p. xii; see also Sorokin, 1951, p. 177.
50. The theoretical side of Welfare Economics is organized around three main theorems. For a brief but readable discussion of these see Feldman, 1987, pp. 889–94.
51. See the article on “Altruism” by Hammond, 1987, p. 86.
52. Blaug, 1980, p. 140.
53. See, for example, Hutchinson, 1964; Myrdal, 1970; Heilbroner, 1973.
54. Blaug, 1980, p. 146.
55. Myrdal, 1970, pp. 55–6.
56. See Hausman and McPherson, 1993; Rodney Wilson, 1997.
57. See, for example, Dopfer, 1976; Balogh, 1982; Bell and Kristol, 1981.
58. See, for example, Skinner, 1986. This book provides the story behind some of the most valiant rebels against the tyranny of normless human sciences.
59. Warnock, 1972, p. 85.
60. Wiseman, 1991, p. 150.
61. Fulton and Gee, 1994.
62. See, Janos Horvath, “Foreword”, in Solo and Anderson, 1981, pp. ix–x.
63. Hahn and Hollis, 1979, p. 12.
64. Solo and Anderson, 1981, p. x.
65. Lutz and Lux, 1979, p. ix.
66. Maslow, 1970.
67. Choudhury, 1986, p. 237.
68. Sen, 1987, pp. 78 and 79.
69. Hausman and McPherson, 1993, p. 723.
70. Schadwick, 1975, pp. 229 and 234.
71. Lutz, 1990, p. ix.
72. Minsky, 1986, p. 290.
73. Galbraith, 1987, p. 284.
74. John Hey, 1997, p. 4.
75. Blaug, 1980, p. 121.
