Talk explains how the social sciences emerged as a replacement for Christianity, and are built on moral foundations in dramatic conflict with Islamic values. We go on to explain how we can develop alternative teaching methodologies within the Islamic world. Agent Based Modeling provides a general purpose tool which we can use to redo standard Economic theory models, and create alternatives.

1. Rebuilding Economics on
Islamic Foundations
Dr. Asad Zaman
Monday 24th July 2023
International Institute of Islamic Economics
International Islamic University of Islamabad (IIIE, IIUI)
Download THESE slides from http://bit.ly/SSreif

2. The Puzzle of Western Social Sciences
Social Science is the study of human society.
But WHICH society?
The term “science” makes the misleading suggestion that there are
universal laws which apply to all human societies.
This is easily proven to be false. Economic, Political, and Social
structures have been extremely different in different societies.
See: http://bit.ly/AZpss

3. Why is term “Social Science” used?
Science applies to external world, which behaves subject to laws.
Human beings are free. Our behavior cannot be predicted by any
mathematical laws.
Societies have evolved and changed dramatically, in the past century,
before our eyes. There are no universal “scientific” laws applicable to
all of them.
All of this is VERY EASY to prove. Despite all of this, there are “social
science” departments in universities all over the world. WHY?

4. The Origins of Western Social Sciences
• More than a century of devastating wars between Protestants and
Catholics in Europe. One third of population wiped out in certain
regions. All of European population affected.
• Scholastics built social science on Biblical foundations. This was
rejected by all thinkers – Christianity leads to wars.
• Necessity to rebuild all of social sciences without invoking Christianity.
• The Enlightenment Project: Create a science of society which allows
different religions to live together in peace.

5. New Answers to Fundamental Questions
1. How was the Universe created?
2. What is the purpose of our lives?
3. How should we behave towards each other? (ethics)
4. What should be the institutional structure of society? Politics
5. How should we arrange for production and distribution of goods
and services? (economics)
See: http://bit.ly/IR3owss

6. Even more fundamental question:
What is knowledge?
How can we know if something is true? Or false?
Christian Answer: All knowledge is founded on the Bible.
Islamic Answer: Quran and Sunnah are foundation for all knowledge.
Enlightenment Answer: Knowledge comes from senses and reason.
Reject authority and tradition, and rebuild knowledge from ZERO.
Descartes: I think therefore I am.

7. Foundations of Western Social Sciences
• There is no God, or Creator (no empirical evidence!)
• Universe was created by chance events.
• Man is just another type of animal, created by the evolution process.
• Life is a jungle. Survival of the fittest is the only moral code.
• Purpose of our lives is pursuit of pleasure and power.
ALL of the above assumptions are embedded within the concept of
“rationality”!

8. Enlightenment Conceit: There is no one like us!
Enlightenment thinkers thought of themselves as revolutionaries.
Dismissing all accumulated human knowledge as ignorance and
superstition, they sought to rebuild the entire stock of human
knowledge on solid foundations of empirical evidence and reason.
They thought that they had created a unique civilization – unparalleled
in human history – and that all of mankind would follow in their
footsteps, once they learned to reason!
Immanuel Kant – the greatest moral philosopher of Europe – thought
that only white males were rational. Females, and other races were
defective in their ability to reason.

9. Why Social “Science”?
Derived on basis of empirical evidence and reason (rationality) –
therefore, same for all rational human beings.
Institutional pattern for the most advanced human society – Europe –
and therefore valid as an ideal goal for all other (primitive) societies.
Above are all Eurocentric prejudices, accepted as truths by colonized
minds.
See: Recep Senturk: Decolonizing the Social Sciences http://bit.ly/RSdss

10. Lesson: Social Sciences are the “DEEN” which
replaced Christianity (Scholastics SS)
This DEEN is based on rejection of God, and hence make pursuit of
pleasure and power the goal of life.
There are no moral values in this DEEN.
Both of these lessons are at the foundations of Economics.
Utility theory: it is rational to maximize pleasure = Nafs-e-Ammara
Game Theory: it is rational to betray commitments if you get benefit
from doing so.
See: Rebuilding Social Sciences on Islamic Foundations: Parts 1 &2
http://bit.ly/AZrss1 and http://bit.ly/AZrss2

11. • So, What Should We Do?

12. The Central Problem Facing the Ummah:
Western Education
Western Education teaches us that all useful “knowledge” was created
by European intellectuals over the past three to four centuries.
The Quran, Sunnah, and the entire Islamic intellectual tradition has no
relevance or importance for the modern world.
For “guidance” out of ignorance and darkness – spread over the Islamic
world – the SOLE path is through Western knowledge, NOT through the
Quran.
All these are dramatically wrong, yet widely believed throughout the
Islamic World.

13. The Ghazali Project (http://bit.ly/Ghazali1)
Counter to the Modern Mu’tazila (see: http://bit.ly/AZtmm )
1. Al-Munqid min al-dalala: Deliverance from Doubt.
2. Tahafat al-Falasaf: Incoherence of Western Knowledge (Economics)
3. Ihya-Uloom-ud-Deen: Revival of the Religious Sciences.
Step 1 Our Deen provides complete and perfect guidance for society,
including Economics. See: http://bit.ly/IslamicEcon2023
Step 2: Critique of Western Economic Theories.
Step 3: Rebuilding Economics on Islamic Foundations.

14. A Concrete Plan: Agent Based Modeling
This is a theoretical tool which allows us to rebuild all of modern
Economics on new foundations.
The tool is NEUTRAL, not Islamic. It is based on SIMULATIONS of
economies, where we can program any type of behavior into our
agents.
In particular, we can create economies where agents behave Islamically
or otherwise, as well as mixed economies with both types of agents.
We simply OBSERVE what happens in our simulations, and compare
with real world situations.

15. Keynesian Revolution: Undone by Lucas
See: Keynesian Revolution and Monetarist Counter-Revolution
http://bit.ly/KRMCR
Central Problem Facing Keynes: Long and Persistent High
Unemployment following the Great Depression.
IMPOSSIBLE according to classical economics: Supply and Demand for
Labor would ensure full employment. All unemployment is
VOLUNTARY: laborers do not WANT to work at going market wage rate
– they would like higher wages.
This did not conform to observed labor market situation.

16. Three Keynesian Insights:
• Complexity or Emergence: The system as a whole is not a simple sum
of the parts.
• Unpredictable Future: prices in future cannot be predicted today. This
means profit maximization is impossible.
• Money Matters, in short run and in long run.
These insights DESTROY conventional micro and macro.
Macroeconomics cannot be built on micro foundations. Single Agent
Macro models are wrong. Money stores value from present to future,
but value of money is unpredictable. This makes money non-neutral.

17. Practical Implication
ALL of economic theory we teach is completely irrelevant to
understanding the real world.
FURTHERMORE, it leads to dangerously wrong policy prescriptions.
I used this insight to supervise more than a hundred Ph.D.’s and
M.Phil.’s
There is no need to understand economic theory. Just take a real world
economic problem, and use common sense to try to solve it.
Historical and Qualitative methods work much better than
econometrics and data analysis building on wrong theories.

18. One Illustration of Complexity
Consider a very simple isolated economy.
Firms hire labor from Households, and pay them wages. Firms produce
products, and sell them to Households.
Profits to Firms MUST come from reductions in Money Holdings of
Households.
Profits of Firms PLUS Household Savings = ZERO!
Increases in total money occur when Government Spends Money.
Government Deficit = Firm Profits PLUS Household Savings.

19. Practical Strategies
• Teach Micro, Macro “lightly” – do not focus on the mathematics,
focus on the conceptual framework.
• Explain why this conceptual framework is wrong. Use my lectures on
Islamic Economics for this purpose: http://bit.ly/IslamicEcon2023
• Use the Anti-Textbooks of Rod Hill and Tony Myatt – this will develop
very deep understanding of central Micro and Macro concepts, far
better than conventional textbooks.

20. The Microeconomics Anti-Textbook:
A Critical Thinker's Guide
• Mainstream textbooks present economics as an objective
science, free from value judgements. The Microeconomics Anti-
Textbook demonstrates this to be a myth – one which serves to
make such textbooks not only off-puttingly bland, but also
dangerously misleading in their justification of the status quo
and neglect of alternatives.
In this fully updated and expanded edition of their celebrated
book, Professors Rod Hill and Tony Myatt lay out the essentials
of each topic in the standard texts in a clear and concise way,
before presenting an 'anti-text' analysis and critique.
Challenging the assumptions, arguments, and models, Hill and
Myatt provide the essential guide to decoding the textbooks,
and show that real economics is far more interesting - and
subversive - than the simplistic version presented to students.

21. The Macroeconomics Anti-Textbook:
A Critical Thinker’s Guide
In this much-needed companion volume to the popular Microeconomics
Anti-Textbook, Tony Myatt reveals how the blind spots and
methodological problems present in microeconomics continue to exert
their influence in mainstream macroeconomics. From a flawed
conception of the labour market, to a Pollyana view of the financial
sector, macroeconomic principles as they are set out in conventional
undergraduate textbooks consistently fail to set out a realistic, useful,
or equitable framework for understanding the world.
By summarising and then critically evaluating the major topics found in
a typical macroeconomics textbook, the Anti-Textbook lays bare their
sins of omission and commission, showing where hidden value
judgements are made and when contrary evidence and alternative
theories are ignored. The Macroeconomics Anti-Textbook is the
student's essential guide to decoding mainstream macroeconomic
textbooks, and demonstrating how real-world economics are much
more interesting than most economists are willing to let on.

22. Agent Based Models
Very simple and intuitive: Create “agents” within an economy, which
play roles of firms, consumers, government, etc. Provide them with
simple rules of behavior. SIMULATE to see what happens.
Why was this not done earlier? Computing capabilities were not
present.
Instead – VERY ARTIFICIAL assumptions were made to enable
computation. Like Cobb-Douglass production functions.
Because foundations were created in artificially simple mathematical
models, economics continues on this artificial basis. We can launch
revolution by replacing these foundations.

23. Simulations are a powerful tool
I also taught econometrics and statistics via simulations – this avoids
massive amounts of heavy mathematics, and allows students to
intuitively and visually understand very complex statistical techniques.

24. ABM is a powerful tool.
We can use it to investigate ALL economic problems.
Even though this is a natural tool, it has been HEAVILY resisted by
economics profession in USA/Europe.
This is because results are strongly in conflict with mainstream
economic theory.
Just like behavioral economics, ABM and Evolutionary Economics has
been shunted aside.
We can therefore do Leap-Frogging – just like the Japanese Steel
industry. USA/Europe are stuck in obsolete methods.

25. Supply and Demand: ABM Analysis
Goal: To bring out clearly the ASSUMPTIONS underlying S&D analysis.
To show that these assumptions are wrong.
To show what happens when we change these assumptions to more
realistic ones.
To demonstrate a flexible tool (ABM) which can be used to analyze
nearly all economic problems.
In particular, ABM handles heterogeneity, complexity, non-equilibrium
dynamics, non-optimization behaviors – all of which are realistic, but
impossible to handle via conventional economics.

26. Mankiw’s Housing Rental S&D Model
There are ten identical houses:
H1, H2, …, H10: House H(j) wants to rent for minimum of 100 x j USD
There are ten students:
S1, S2, …, S10: Student S(k) has maximum rent budget of 100 x k USD
OBVIOUS Solution: Assign H(j) to S(j) – all houses are rented, and all
students have housing. This solution is NOT equilibrium and is NOT
efficient according to economic theory. WHY NOT? What will happen if
we start out here?

27. Critical Assumption: Law of One Price
If identical housing units are for sale, then they all must have the same
price IN EQUILIBRIUM.
First objection: Housing units are rarely identical.
There is no way to answer this objection within neoclassical economics.
If there is heterogeneity – every house is unique – then every house is
a market with only one object in it. This cannot be a competitive
market, and therefore S&D will not apply to it.
ABM can handle this issue easily. It is designed for heterogeneity.

28. How does law of one price emerge?
Walrasian Auctioneer: Calls out a rental price WRP, same for all.
All students who can afford houses at WRP indicate demand.
All houses who can afford to rent at WRP indicate supply.
If Supply matches Demand, we have equilibrium.
If Supply is greater than demand, then WRP must be increased.
If Supply is less than demand, then WRP must be decreased.
Approach to equilibrium requires RE-CONTRACTING – break existing
contracts, and make new ones.

29. Walrasian Model is not realistic
Critical Defect: There are no price makers, only price takers, in S&D
models. So WHO sets prices?
The Auctioneer does not exist in the real world.
Also, using an auctioneer is not aligned with ABM methodology – ABM
methodology sets micro-behaviors and observes macro results. But,
Auctioneer is a non-existent macro level agent.
Government can make institutions and rules and laws. Society can
create social norms. But active Macro and Micro inter-action with
agents is not ABM.

30. We can use ARBITRAGE to arrive at S&D
Look at top and bottom trades, and do arbitrage. Start with Student
with most expensive house:
S10 can afford 10,000 PKR and H10 has cost of 10,000 PKR.
But identical house is also available at PKR 1000, and this house is
currently rented to S1, who can only afford to pay PKR 1000.
If S10 is selfish (does not care about S1), he can offer PKR 2000 to H10.
Re-contracting must be possible, to get S&D equilibrium.
Now H1 will break current contract with S1, and enter into a new
contract with S10 at PKR 2000.

31. Next Arbitrage Step
Take House H2, currently rented for 2000 to S2. H2 notes that many
students are paying much more. So H2 goes to student S9, currently
paying PKR 9000, and says I can rent you my house for PKR 8000.
Again, S9 breaks original contract with H9, and re-contracts. So at end
of two steps of Arbitrage, we have:
H1 rented for PKR 2000 to S10
H2 rented for PKR 8000 to S9
H(k) rented for PKR k x 1000 to student S(k).

32. How can this arbitrage work in real world?
When House and Student enter into an agreement, this is agreement is
posted on Bulletin Board in University Housing Office, and does not
become final until 24 hours pass.
After making agreement, every student watches bulletin board. If he
sees a cheaper house, he makes a bid on it. Also, every homeowner
watches bulletin board. If he sees a student paying more rental, than
he offers his house to the student.

33. Final Result from Arbitrage
Equilibrium price must be between 500 and 600 – say 550.
At 550, H1, H2,…,H5 are willing to rent, while rest are out of market.
Also S6, S7, …, S19 are willing to rent, while rest are out of market.
So we have equilibrium.
So Arbitrage leads to economic equilibrium through many broken
promises and many broken hearts.
BUT, according to economic theory, market equilibrium is EFFICIENT.
WHY?

34. Market Equilibrium maximizes SURPLUS
Student S(k) is willing to pay k x 1000 PKR. If he rents at k x 1000, he
has ZERO surplus. If his budget is 10,000 and he rents at 5,500 then he
has 4,500 PKR surplus. This is extra money he can spend and enjoy.
Homeowner H(j) has costs of j x 1000 – if he rents for j x 1000, he just
covers costs and has zero surplus. If his costs are 1000 and he rents for
5,500 he gets 4,500 PKR surplus to enjoy.
Original Solution S(k) in house H(k) has zero consumer surplus and zero
producer surplus. It is the WORST solution according to economic
theory.

35. This ignores those who are out of market
Assumes that students and households who do not transact have zero
surplus.
But, this is false. Students out of market cannot go to the university – it
is too expensive for their budgets. Massive disutility corresponding to
complete change of life-plans.
Households out of market incur high costs from keeping houses empty.
Again, large costs which are not taken into account in Economic
Efficiency.
The matching equilibrium is MUCH BETTER than S&D equilibrium.

36. Many Possible ABM variations
Heterogenous Housing.
No re-contracting. Contracts are binding. This would lead to search
equilibrium – students may not rent first house that is acceptable.
Search equilibria are different from S&D equilibria. These can easily be
built into ABM models and explored via simulations.
Limited search in real-time would lead to outcomes different from
theoretical search models, assuming costless search.

37. Posted Prices
ABM model has negotiations between Houses and Students for rent.
In Posted Prices model, Houses must POST prices which are fixed and
cannot be changed.
The Oral Double Auction leads to convergence to S&D, but Posted
Prices does not.
How does a housing market with posted prices work? This is realistic
version of Mankiw’s theory, which leads to vastly different results.
Exploring variations of this model will lead students to deep insights
about S&D, far deeper understanding than conventional theory.

38. Concluding Remarks
ABM is the natural method for studying economics.
Mathematics required for studying ABM is much easier than the Alpha
Chiang textbook we teach for Mathematical Economics.
We should replace Alpha Chiang courses by course in programming. In
particular, Python and NetLogo are useful languages to learn for doing
simulations. This should become a required course for our students
(while dropping mathematics).
This methodology has been suppressed in USA/Europe because it
produces results in conflict with conventional economics.

39. Relation to Islamic Economics
• We can program our “agents” to have any kind of behavior.
• Some types of behaviors can be classified as homo economicus.
• Others can be called homo islamicus.
• We can also program intermediate types of mixed behaviors.
• Individuals can also behave in ways which are averages of community
behavior – this allows for change in behavior patterns as community
evolves.
• Evolutionary economics studies what kinds of behavior patterns lead
to long-run welfare for communities. Cooperation wins over
Competition, in many natural cases.

40. So what should we do?
• We have been programmed to be FOLLOWERS. We study what our
Western leaders are doing, and attempt to imitate to best of our
abilities.
• Launching a revolution requires thinking like leaders. There are no
textbooks which show how to do ABM-based Islamic Economics.
• We will explore these models together with our students, arrive at
insights, and write them up into textbooks, for use throughout the
Islamic world.