Mohammad Afif Naqib Bin Azlan

Muhammad Faiq Bin Alias

Muhammad Luqman Bin Kahairi

Muhammad Afi Hasif Bin Roslan

Mohamad Syahid Bin Noorhijas

International Islamic University Malaysia (IIUM)

Mainstream economics, often synonymous with free-market economy without a doubt, has exercised pivotal role in policy making and economic thoughts. It started as a discipline rooted in morality and political economy. But, economists began incorporating tools of physics and mathematics in numerous economic models. To non-economists, the theories expressed in mathematical language seem sophisticated.

Though, the use of mathematics is not without its merits, but too many assumptions lie behind the models. Mathematical rationality often fails to capture the real-world complexities. The ‘marginal revolution’ introduced by Walras and Jevons made economics lost its moral and human sentiment. The belief of competitive equilibrium views the world as a mechanistic construct that acts with certainty and predictability.

The rise of mainstream economics was heavily inspired by Adam Smith’s work, The Wealth of Nations (1776), which laid the foundation for modern economic thought. Following this milestone, the field continued to evolve with contributions from other prominent economic thinkers, including Thomas Malthus, David Ricardo, and Karl Marx, each of whom built upon or challenged Smith’s ideas, shaping the diverse schools of thought that characterize economics today.

One of the mainstream economist’s core beliefs is taken from Smith’s work, i.e. emphasis on sovereignty of self-interest as a motivation for decisions in the marketplace. Smith said: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest”.

It encapsulates the idea that individual pursuits lead to broader societal benefits. This belief forms the core of free-market economics which assumes that markets can self- regulate through competition and rational behaviour without the need for external intervention. The word ‘rational human’ as defined by mainstream economists refers to someone who makes economic decisions based on his/her self-interest without any regard to others. However, the assumptions underlying this theory—perfect competition, full information, and rational decision-making—often simplify human behaviour and economic interactions to an unrealistic degree.

To an economist, there is no society with families, but only individuals who act on their self-interest. There is no place for unconditional love or altruism in the pain-pleasure calculus of a person motivated by selfish self-interest.

The mainstream economics we know now is an even more perverted version of Smith’s work. In an earlier book ‘The Theory of Moral Sentiments’, he argued that societal and moral sentiments are important to exercise self-control. He also believes that government should be necessary in supporting the moral framework such as providing education to the poor. This part of his work is generally ignored in mainstream economics framework while the idea of self-interest shines eminently.

Mainstream economics often overlooks income distribution, assuming wealth redistribution to maximize social welfare. However, in practice, wealth is concentrated due to profit maximizing firms using their competitive advantage. Taxation is the only way to redistribute wealth, requiring government intervention.

On the other hand, Islamic economics provides a framework for income redistribution through the state, focusing on the teachings of Quran and Sunnah. Islam introduced instruments of wealth distribution, such as Zakat and Sadqa to avoid wealth concentration. Zakat can have an income multiplier effect, reducing idle capital and increasing labour force participation rates. To implement a fair distribution, the state must provide basic needs and ensure a minimum standard of living for everyone. Policies such as subsidies, price control, public goods provision, public transfer payments, and minimum wage can help achieve equitable distribution as long as they do not contradict Shari’ah principles.

Mainstream economics does not emphasize income distribution, as it assumes wealth is redistributed to maximize social welfare. However, in practice, wealth is concentrated due to profit maximising firms using their competitive advantage to expand and gain more profit. Taxation is the only way to redistribute wealth, requiring government intervention to avoid income disparity. Neoclassical economists have been trying to find the Pareto optimal way to redistribute wealth through a social welfare function.

On the other hand, Islam introduced multiple instruments of wealth redistribution, such as Zakat, Sadqa, Fara’id, and Waqf, to avoid further disparity. The state bears the ultimate responsibility in implementing a fair distribution, ensuring that basic needs are met and that societies strive to reduce disparities through voluntary exchanges.

Neoclassical debates on economic justice involve Robert Nozick and John Rawls, who both define economic justice differently. Nozick defines justice as entitlement and liberty, while Rawls sees it as fairness. Both argue that economic inequality is allowed only if everyone in the economy has the same fundamental rights and opportunity, and the least advantaged member of society can still benefit from the economy.

The debate also encompasses Pareto efficiency, or economic allocations where no one can be made better off without someone else being made worse off. Critics argue that this approach often fails to address issues of equity and justice, as it may justify significant wealth disparities as long as they do not worsen the welfare of others.

Mainstream economics views the world as a functioning machine, with one action resulting in a specific outcome. However, this assumption often overlooks the impact of an individual’s actions on others or the environment.

Environmental economics aims to minimize damage by adopting policies that prevent harm to the environment. Some economists draw parallels between environmental pollution and inequality, arguing that pollution and inequality are indirectly affecting each other. Chancel proposes solutions such as taxing pollution and allocating resources to support the poor while ensuring their consumption does not exacerbate environmental issues.

In contrast, Matthew Kahn’s approach to the problem is free market, relying on market forces and advocating human ability to adapt and innovate. Kahn acknowledges environmental concerns but claims that the dangers are often exaggerated.

In Islamic economics, the environment is considered a gift from God, entrusted to humanity for stewardship and growth. Islamic teachings incentivize individuals to act in ways that preserve the environment, aligning their actions with moral and ethical principles. Islamic governance uses principles derived from the Quran, Sunnah, and the concept of Maslaha (public interest) as a framework for environmental protection and resource management.

This discussion focuses on the flaws in mainstream economics, which are empirically false, do not reflect the real world and are also socially unacceptable.

Mainstream macroeconomics is a social science that aims to understand the process and path towards achieving growth in the economy. The mainstream economics models have been used for forecasting and policy making, but mainstream economics had failed to predict the Great Economic Recession in 2007-2009. The models also fail to consider the social aspects of consumer behavior, such as commitment, culture, and environment. Inconsistency is inherent in human behavior and should not be overlooked by simplistic assumptions in forecasting.

It is essential for economists to exercise differential diagnosis in every economic problem or forecasting from every aspect, including monetary and social aspects. Moral and human aspects should be prioritized over mathematical and theoretical models when diagnosing economic challenges. Overall, the discussion emphasizes the importance of understanding human behavior through mathematical models and incorporating these factors into economic forecasting.

Unemployment remains a significant issue in the global economy, with the Great Economic Recession of 2007-2009 causing an average of 700,000 workers to losing their jobs each month. This economic catastrophe was partly attributed to the belief in a free-market economy that emphasized deregulation. Despite the eventual recovery, unemployment persisted throughout the years.

Mainstream economics, which focuses on the law of supply and demand, does not always hold true in practice, as many firms contracted or shut down during the recession, reducing their capacity to supply labour opportunities. Free-market economists oppose minimum wage policies, arguing that setting a minimum wage creates labour surpluses. However, minimum wages are often justified as a social safety net to ensure workers can sustain themselves as their incomes have decreased during the recession but, they still have previous commitments to pay.

During the recession, labour force participation remained low, with many laid-off workers involuntarily taking part-time jobs to sustain themselves. The number of discouraged and unemployed workers reached 9.8%, peaking at 17% during the trough. To mitigate the economic fallout, the government approved numerous social programs, resulting in high transfer payments. Mainstream economists often criticize these interventions, arguing that they may disincentivize work and prolong unemployment.

Unemployment imposes significant non-economic burdens, particularly on lower-income families. Financial instability affects households in numerous ways, and research indicates that unemployment correlates with poor mental and physical health, including higher mortality rates. Unemployment has also been linked to negative emotional states, such as anger, stress, depression, anxiety, and pessimism.

Conclusion

Mainstream economics has limitations and shortcomings, particularly in its simplified view of human behaviour and its neglect of social and environmental factors. The overreliance on mathematical models and the pursuit of equilibrium often fail to capture the complexities and uncertainties of the real world. Furthermore, the emphasis on individual self- interest, while not acknowledging Adam Smith’s broader perspective on moral sentiments can lead to a neglect of social responsibility and worsen inequality.

This highlights the need for a more nuanced and holistic approach to economic analysis. While acknowledging the contributions of economics, particularly in understanding market mechanisms, it is crucial to recognize its limitations and seek alternative perspectives. This includes incorporating insights from behavioural economics, environmental economics, and Islamic economics which offer valuable frameworks for addressing social and ethical concerns. Eventually, a more comprehensive understanding of economic systems requires a multidisciplinary approach that considers not only economic factors but also social, environmental and ethical dimensions. By acknowledging the limitations of mainstream economics and embracing a more holistic perspective, we can create a more just, equitable and sustainable economic future for all.