False Economic Theories Blind Us to Solutions

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

This is part 2 of a talk on “Current Economic Crisis in Pakistan & Solutions: An Islamic Perspective” given by Dr. Asad Zaman at COMSATS on Monday 10th Apr 2023.  This is an English version, broken up into smaller parts. For Part 1, see Current Crisis in Pakistan: Easy Solutions Blocked by Power. This Part 2 explains that one of the barriers to diagnosing the problem, and finding solutions, is FALSE economic theories.

Even though the problem is simple, and the solution is simple, policymakers and economists are NOT seeing it! Why? Because Economic Theory puts blindfolds on our eyes, and makes it impossible to see the problem, or the solutions. To understand why, we must review some history, which is essential to understand modern economics:

1. Collapse of Soviet Union – largest country on the planet – in 1991.
2. American think tanks start planning the “American Century” – a project for global domination by the USA.
3. A collection of Economic policies known as the “Washington Consensus” emerges. The World Bank enthusiastically promotes these policies as the only path to development.
4. The other path – communism – which had led both Russia and China to amazing growth paths, was now closed. This closure of options permits Washington to impose its desired economic policies on the rest of the globe.

What is the Washington Consensus? It is a standardized collection of economic policies to be adopted everywhere across the globe, supposedly to create economic growth and development. This is puzzling, because one would think that appropriate development policies would vary from country to country depending on their situation and the configuration of opportunities and constraints facing them. The mystery can be resolved by looking through the appearances to the hidden motives behind these policies: facilitation of maximal exploitation of the poor countries by the multinational corporations which run the world today. Of the ten policies recommended by the Washington Consensus, one set is to cripple the government and private sector, to prevent them to compete with, or regulate, the activities of these corporations:

• Fiscal Adjustment: refers to reducing government expenditures, and hence the power of the government, on the pretense that this will help reduce inflation.
• Tax Reforms: Increasing tax burdens on domestic enterprises prevents them from being able to compete with foreign corporations.
• Deregulation: This plank allows foreign corporations at act freely, without government regulations.
• Privatization: State Owned Enterprises are the only ones with sufficient power and resources to compete effectively with foreign corporations. These must be removed, to clear the field.
• Removal of Subsidies: Subsidies enable local institutions and corporations to compete with foreigners, and must be removed. Social security programs enable the people to live, and deprive foreign corporations of cheap labor, so these must also be scaled down.

A second set of policies is designed to allow foreign corporations to exploit domestic resources and freely transfer their profits abroad.

• Competitive Exchange Rate: Ensures that foreigners can easily move money into, and out of, the country. This caused the East Asian Crisis, when foreigners moved huge amounts of money out of these countries. This should be prohibited, but that would hurt foreign interests.
• Removal of Barriers to Foreign Investment: Permits foreigners to invest in the domestic economy.
• Financial Reforms: Financial markets should enable easy inflow and outflow of foreign capital.
• Trade Liberalisation: It should be easy to move goods in and out of the country.
• Rule of Law: Property Rights: Foreign capital should be protected against seizure by the government, especially when they engage in activities harmful to domestic interests.

While none of the Washington Consensus policies help to promote domestic growth, they all help to generate and protect profits of foreign corporations. So there is no surprise that implementation of these policies around the globe in the 1990’s was a complete failure, in terms of promoting growth. Harvard Economist Dani Rodrik has documented this failure in his article: Goodbye Washington Consensus, Hello Washington Confusion. The World Bank itself produced a report which concludes that these policies were implemented around the globe in the 1990s, but did not produce any positive results. Similarly, the author of Washington Consensus, John Williamson, also admitted this failure in “The Strange History of the Washington Consensus”. But, instead of rejecting Washington Consensus, he argued that these policies needed to be supplemented with an ADDITIONAL ten points to be effective!

Despite the experienced failure of the Washington Consensus, economic pundits around the globe CONTINUE to recommend these policies, as solutions to our economic problems. Why? Because economic theories taught in universities around the globe blindfold us, and prevent us from seeing the truth. Active efforts are made to DECEIVE us about the path to economic independence. One important evidence for this is provided by the World Bank book on The East Asian Miracle. The book opens by saying that these countries created miraculous growth. They violated EVERY rule of the Washington Consensus, and defied all policy recommendations made by World Bank and IMF. The goal of the World Bank book is to explain why other governments SHOULD NOT follow their example!! The book tries to explain that their success occurred DESPITE their violation of free market liberalism, and not BECAUSE of it. Despite the clear failure of Washington Consensus policies around the globe, and also the miraculous success of countries that defied the Washington Consensus, the effort continues to sell us policies against our national interests. These efforts have been quite successful – the vast majority of public debate and discussion about the current Economic Crisis continues to rely on the Washington Consensus views, as the solutions to our problems. 

We can conclude this part 2 by summarizing the lessons so far. We cannot pursue independent economic policies required for success and growth, because we are still colonized: White Colonizers have been replaced by Brown Bureaucrats, trained in exploitation by the British. The mechanism of this colonization is two-pronged. The rich and powerful elite receive massive amounts of foreign aid to help them retain power. The intellectuals of the country, the brains which could recognize this and revolt, are lobotomized into accepting false economic theories. Thus we pursue policies that enable foreign corporations to exploit local resources, make massive profits, and repatriate them, while preventing the development of domestic industries. 

Stepping outside the framework of the talk, we can draw some Meta-Conclusions which help us understand the bigger picture. It is crucial to realize that we cannot understand Economic Theories outside of their historical context. Stripping the historical context is essential to the deception. History is not mentioned in standard economic theory, depriving students and teachers of the ability to understand the historical roots of our problems.

Similarly, economics cannot be understood without understanding politics and power. This has been most clearly recognized by Karl Marx and his modern followers. However, courses that mention Marxist theories are not part of university syllabi anywhere in Pakistan, and more generally around the globe. Michel Foucault’s philosophy that Power=Knowledge is most strongly reflected in the discipline of Economics. The theories we learn are designed to protect the interests of the powerful – See “Why Economists Persist in Using False Theories?”. Class Struggle – the conflicting interests of the masses, versus the interests of the rich and powerful – has been a central driver of developments in both economic policies, and of economic theories. However, this is never mentioned in economics textbooks, making students and teachers blind to the real problems, and unable to see the simple solutions.