Ninth Harvard University Forum on Islamic Finance

Islamic Finance, Building Bridges Across Financial Communities

FREE MARKET MADNESS AND HUMAN NATURE

By Dr. Necati Aydin Director of Neuroeconomics and Well-being Program Florida State University Tallahassee, Florida

March 27-28, 2010

Harvard Law School Cambridge, Massachusetts

INTRODUCTION Capitalism is not facing a serious crisis for the first time. In fact, according to one estimate, there have been over an hundred crises in the last four decades.1 For that matter, the 2008 financial crisis is a historical, but not a rare occurrence. It bears the footsteps of other crises that emerged throughout the history of capitalism. However, the 2008 financial crisis is undoubtedly the greatest one since the Great Depression. According to the former Chairman of the Federal Reserve, Alan Greenspan, this is a credit tsunami.2 Starting with the crash of the U.S. housing and mortgage market in the summer of 2008, the crisis of trust in financial markets caused over a trillion dollar loss within a few weeks. Even the most liberal governments decided to intervene in the free market. The governments of developed countries used taxpayers money to support the bleeding financial sector despite their discontentment. Within a few weeks, they injected $2.4 trillion into the market, but failed to stop the crisis. Some countries had to nationalize their major banks even though they were not pleased to be blamed for socializing financial system. The April 2009 issue of the Global Financial Stability Report (GFSR) estimated that credit write-down on U.S.-originated toxic assets since the start of the crisis would reach $2.7 trillion. Including assets originated in other mature market economies, total write-downs globally could reach $4 trillion over the next two years.3 The U.S. government passed two spending packages totaling $1.5 trillion in order to rebuild confidence and boost demand in the market. In addition to bailout packages, the Federal Reserve injected cash into the troubled banking system. According to Jeffrey Sachs, the president of Earth Institute, the full economic cost of current crisis to the U.S. alone will be $15 trillion, which is greater than her yearly GDP.4 In other words, on average, the financial tsunami ultimately might cost one year of work per each American. In short, the 2008 financial crisis touched almost every nation around the world. People had watched with awe and shock and asked the following questions: is this going to be the end for capitalism? Or is it just another great depression? Was Karl Marx right in his view of capitalism? Is capitalism preparing its own end? Why does capitalism face such crises? I will try to answer those questions in this paper. After summarizing the recent free market madness as suggested by Peter Ubels recent book5, I will first discuss the success and failure of capitalism in terms of its assumptions about human nature. Then, I will offer an alternative theory of human nature from an Islamic perspective to explain, overcome, and prevent financial crises. The new theory provides an answer to some challenging questions regarding the success of capitalism against socialism and the root causes of the financial crisis. It provides some recommendations to policy makers and individuals to properly deal with the irrational aspects of human nature which ignite financial and economic crises. THE ROAD TO THE FREE MARKET MADNESS Populist politicians, greedy capitalist entrepreneurs, and conspicuous consumers prepared the perfect storm conditions for the 2008 financial crisis. Many causes can be mentioned for this
1

Joseph Stiglitz, Development and Modernization Dealing with Debat- How to Reform the Global Financial System, Harvard International Review, 2003, vol.25(1):54. 2 NPR news article, Greenspan Calls Financial Crisis A 'Credit Tsunami', NPR website: http://www.npr.org/templates/story/story.php?storyId=96023610, accessed on February 10, 2010. 3 IMF. Global Financial Stability Report, Responding to the Financial Crisis and Measuring Systemic Risks, April 2009. 4 Jeffrey Sachs, an interview given to National Public Radio, Talk of the Nation, March 3, 2009. 5 Peter Ubels book, Free Market Madness: Why Human Nature is at Odds with Economics--and Why it Matters, was published by Harvard Business Press in January 2009. Ubel argues in this book that the economic crisis is due to the irrational aspect of human nature which caused free market madness. 2

crisis. In my opinion, the root cause of all the possible causes might be the animal spirit with a greedy and selfish nature. Politicians who acted upon the greed for votes, capitalists who acted upon the greed for profit maximization, and consumers who acted upon the greed for pleasure maximization made the crisis inevitable. Populist politicians deregulated the financial market in 1990s in order to maximize their votes. The government oversight of financial markets hit the lowest level in many decades. Everything was left to the players in the market assuming their rational decisions would bring the best results for everybody. The Federal Reserve Bank became the guarantor for two giant mortgage companies, Fannie Mae and Freddie Mac. Meanwhile, the Fed made cheap credits available to consumers through its low interest rate policy. Relying on the support from the Fed and loose regulations, greedy entrepreneurs opened credits to risky consumers in order to maximize their profits in the short term. In one way, they were acting quite rationally under loose regulations by inventing new instruments in order to make money out of money. They came up with innovative derivative assets to realize their dream. In the subprime market, mortgage originators passed their entire risks to the ultimate creditors around the world. Therefore, they had less incentive to be cautious in their lending decisions. The hidden hand (self-interest) of free market was paralyzed to provide the necessary discipline. Creditors invented various kinds of derivatives to accomplish risk-free lending. The mortgages issued through the guarantor of Fannie Mae and Freddie Mac alone reached over $6 trillion. 6 Mortgage originators who issued mortgages to sell them off to securitizers did not worry about repayment risk. They often failed to verify borrowers income with the IRS despite their ability to do so. They rather invented new instruments to repackage, sell and resell their mortgages in sophisticated ways to investors around the world. They were issuing mortgages to risky customers receiving their premiums and passing the toxic assets to the third parties. From 1987 to 2007, the face value of over-the-counter derivatives rose from $866 billion to $455 trillion.7 Therefore, it is fair to blame excessive and imprudent lending for the 2008 crisis. Indeed, the excessive lending led to a boom in asset prices which in turn fueled an artificial rise in consumption and speculative investment. However, it would be hard to go further in such blame since, in a capitalist society, creditors are motivated to consider profit maximization as the highest measure of achievement even at a high cost to the society at large. If creditors are shielded from the risk sharing due to the lack of sufficient discipline in the financial market, they will engage in excessive lending in order to maximize their profit at least for a short term. Particularly, this will be the case if it is possible for them to transfer their risks by repackaging and selling their liabilities to someone else. Likewise, they assume government protection because they think they are too big to fail. Indeed, there are evidence showing that banks with such a safety net are taking greater risks than what they otherwise would.8 This kind of safety will result in a moral hazard problem because it will give incentives to big creditors to participate in highly risky lending as they would expect a government bailout. However, if creditors are not immune from the risk, they would be more cautious in their lending decisions. Populist politicians and greedy creditors are not the only one to be blamed for the 2008 financial crisis. Conspicuous consumers who took irresponsible credits in order to realize the American dream should receive their fair share. Even consumers with very low credit ratings were given opportunities to realize their dreams. Home prices and homeownership had boomed from the late 1990s up to 2007. The chains of events overly aggressive mortgage lenders, complaint appraisers, and complacent borrowers proliferated to feed the housing
6 7

Forbes 2008, For Freddie and Fannie, Trouble at the Top, April 23, 2009. Foster JB, Magdoff F, The Great Financial Crisis: Causes and Consequences, New York: Monthly Review Press, 2009, p.77. 8 Mishkin FS, The Causes and Propagation of Financial Instability: Lessons for Policymakers, 1997, http://www.kc.frb.org/publicat/sympos/1997/pdf/s97mishk.pdf 3

boom.9 What consumers were doing was quite rational, at least in the short run. They were raised to act based on their interests of utility/pleasure maximization. They were largely driven by their animal spirit to maximize their interests. They were not going to miss the historical opportunity of having more fun with more credits. Indeed, they did not miss it. Many purchased or upgraded their houses without any down payment. Some refinanced their houses to cash out money for vacation, cars, or electronic devices. They were racing to consume more. The jump in demand for housing pushed up prices. In just a few years, home values more than doubled in many parts of the U.S.. With increasing home values, people felt a hike in their wealth. They began to spend even more because of the wealth effect. Economists should be blamed as well because they did not foresee the madness of free market actors. This was mainly due to the professions blindness to the very possibility of catastrophic failures in a market economy. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets especially financial markets-.10 Indeed, they were busy in developing elegant financial models such as Capital Asset Pricing Model (CAPM) assuming that investors rationally balance their risks against possible rewards while making investment decisions. With their flawed recommendation, the bubble got bigger and bigger. For instance, in a 2007 interview before the 2008 crisis, Eugene Fama, the intellectual father of the efficient market theory, stated that the word bubble drives me nuts, and defended his theory even for the housing market: Housing markets are less liquid, but people are very careful when they buy houses. Its typically the biggest investment theyre going to make, so they look around very carefully and they compare prices. The bidding process is very detailed.11 Most economists turned out to be wrong. The creative manipulations and speculations under the disguise of a free market resulted in a big crash. In Peter Ubels terms, what was happening could be defined as Free Market Madness.12 The madness lasted for several years in which everyone was quite happy. However, the happy period did not last long because excessive consumption was based on the bubble in asset prices, not the growth of the real economy. It was not sustainable. It had to fail. The increasing cost of wars and high oil prices resulted in a slowdown in the U.S. economy and burst the housing market balloon. The economy got worse every day. Unemployment reached a record level. Many homeowners, particularly those who received mortgages based on adjustable interest rate, failed to pay back their loans. The American dream for many consumers and capitalists turned into an American nightmare. The homeowners who did not make any down payment when they purchased their house did not have anything to lose other than their keys which they returned to their banks. Foreclosure rates hit a new record every month and property values dropped considerably. Banks which were mostly responsible for creating the housing bubble suddenly found themselves under the remnants of a housing market tower. They became the victim of their short-term desires for profit. They built the housing price tower on unstable grounds. Therefore, with the collapse of the tower, their valuable assets (mortgage notes) suddenly turned to useless papers. Centuryold companies like Lehman Brothers and Merrill Lynch fell one by one. The storm in the credit market quickly turned to a tsunami at a global level. Everyone began to doubt about the fate of capitalism.
9

Shiller Robert J., The Subprime Solution: How Today's Global Financial Crisis Happened and What to Do about It, Princeton, N. J.: Princeton University Press; 2008, p.6. 10 Paul Krugman, How Did Economists Get It So Wrong?, The New York Times, September 2, 2009. 11 Clement D. Interview with Eugene Fama. The Region, December 2007, http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=1134. 12 Peter Ubels book, Free Market Madness: Why Human Nature is at Odds with Economics--and Why it Matters, was published by Harvard Business Press in January 2009. Ubel argues in this book that the economic crisis is due to the irrational aspect of human nature which caused free market madness. 4

The Economist ran a cover story in October 2008, titled Capitalism is at Bay. In its editorial, the voice of capitalism for over 165 years expressed concern that economic liberty is under attack and capitalism, the system which embodies it, is at bay. The Economist was not ready to declare the end of capitalism. Rather, it was calling for help to save capitalism: Capitalism is at bay, but those who believe in it must fight for it. For all its flaws, it is the best economic system man has invented yet.13 Unlike some critics of capitalism, I did not think that the 2008 financial crisis would be the end of it. If we compare the capitalist system to a human body, money is like blood and banks are like blood vessels. The 2008 crisis was not a complete paralysis; rather it was a loss of blood. Of course, any losses would slowdown the growth of the body. However, it is not going to kill the body if new blood is supplied. Likewise, the 2008 crisis slowed economic growth around the world; however, it is not going to kill the system because key players are supplying blood to the system and acting to prevent the bleeding. The financial crisis in the U.S. had global ramifications due to globalization of the economy and the way U.S. mortgage assets were funded. Relying on the assurance from the Federal Reserve, U.S. banks repackaged most of their mortgage assets and sold them to investors around the world. With the collapse of the U.S. market, these international investors lost trillions of dollars. For instance, according to the head of the General Union of Arab Chambers of Commerce, Industry and Agriculture, Arab Investors alone lost $2.4 trillion because of the crisis.14 Indeed, developing countries are paying an even higher price for the crisis. In other words, the financial tsunami is affecting them disproportionately. While the U.S. government is able to find trillions of dollars at low interest rate to finance its unprecedented spending packages, developing countries could not even get credits in the international financial market to fund their basic projects. Those who have money are afraid to lend to developing countries during the crisis and prefer to give it to a developed country like the U.S. because they want to make sure they will get their money back. Even though the U.S. ignited the global tsunami, it is likely to recover earlier than other countries. Indeed, according to The Institute of International Finance, while developing countries received almost $1 trillion credit in 2007, they were able to get only $466 billion in 2008. The amount was estimated to be around $296 billion in 2009.15 In short, unlike the argument made by some discontents of capitalism, the 2008 credit tsunami will not be the end of capitalism. It is making the whole world pay for the mistakes of greedy capitalist entrepreneurs and consumers. As Foster and Magdoff state, the tragedy of the U.S. economy is not one of excess consumption but of the ruthless pursuit of wealth by a few at the cost of population as a whole.16 Following Keynesian policies, capitalist countries are slowly overcoming this crisis although it might take much longer than a recovery from an ordinary recession. They are regulating financial markets to prevent a similar madness, at least in the short run. They are doing so in order to protect players in a free market from their irrational decisions. However, they are likely to experience many more crises if they do not make fundamental revision in the system based on comprehensive understanding of human nature.

13 14

Capitalism is at Bay, The Economist, October 16, 2008. Arab investors have lost $2.5tr due to global crisis, available at: www.gulfnews.com/business/Economy/10300841.html. Accessed on April 24, 2009. 15 Capital Flows to Emerging Market Economies, The Institute of International Finance, http://www.iif.com/download.php?id=8qgYHuKQ3lU=, accessed on February 10, 2010. 16 Foster JB, Magdoff F, The Great Financial Crisis: Causes and Consequences, New York: Monthly Review Press, 2009, p.38. 5

HUMAN NATURE VERSUS THE NATURE OF FREE MARKET ECONOMY The 2008 financial crisis did not emerge in a vacuum. It was a crisis of capitalist free market market economy. Therefore, it should be understood within the capitalist paradigm. In my view, both the success and failure of capitalism can be explained through its understanding of human nature. As David Hume writes in the introduction to A Treatise of Human Nature, "all the sciences have a relation, more or less, to human nature ... Even Mathematics, Natural Philosophy, and Natural Religion, are in some measure dependent on the science of Man since they lie under the cognizance of men, and are judged by their powers and faculties.17 Indeed, every scientific field explicitly or implicitly relies on a certain theory/understanding of human nature. Despite the agreement on the existence of human nature, there has been major disagreement on the nature of human nature. For many centuries, in the major theories of human nature have come from Judeo-Christian tradition which argues that humans are made in the image of God with certain spiritual faculties in addition to mind. From this perspective, even though humans have tendency to commit sins, they are capable to repent for their sins, respond to the Gods message, choose good, and love God and His creations. 18 The secular theories of human nature are quite different. For instance, John Locke uses the metaphor of tabula rassa describing human nature as a "scraped tablet" which can be shapped by individiuals and society. While some thinkers like Rousseau claim that humans are inherently good (Noble Savage) and learn how to be bad in social life others like Hobbes argue that humans are inherently brutal, nasty and should be civilized through establishing a civil soceity. Both secular and religius theories of human nature aim to understand the common universal elements shared by humanity. It does not matter whether human nature is shaped by God, nature, or nurtured by society. It is the fact that we all have similar biological needs like food, water, oxygen, etc. While types of food may vary from culture to culture, the need for food is common across all cultures. Similarly, we all experience sensual, emotional, intellectual, and spiritual needs because of the universality of our nature. Although methods to satisfy these needs vary among cultures, existence of the needs is shared by all human beings. For instance, every human being has the capacity to love and the desire to be loved. It is only the objects of love and values surrounding the concept that differs across cultures. The understanding of the common elements of human nature is the foundation of any theory, model, system related to human behaviors. Like any other economic system, the capitalist free market system relies on a certain understanding of human nature. Indeed, this understanding is a key to explain both the success and failure of capitalism. In my view, as the success of capitalism comes from its partial understanding of human nature, its failure comes from its partial misunderstanding or exploitation of human nature. On the one hand, the system has been very successful in production and consumption by igniting certain elements of human nature. On the other hand, the system has failed in providing sustainable growth and subjective well-being because of ignoring or denying other elements of human nature. As the secret of success for capitalism in production and consumption is hidden in its understanding of human nature the secret of failure for socialism in the same arena is due to its misunderstanding of human nature. Capitalism at least partially understands and relies on three elements of human nature: ego, animal spirit, and mind. Capitalism uses the market mechanism because of its compatibility
17

Norton, David F, Mary J. Norton, and David Hume. A Treatise of Human Nature. Oxford philosophical texts. Oxford: Oxford University Press, 2000. 18 Miller, William R, and Harold D. Delaney. Judeo-christian Perspectives on Psychology: Human Nature, Motivation, and Change. Washington, DC: American Psychological Association, 2005 6

with understanding human nature. Socialism denies the fact that human behaviors are driven by ego and animal spirits. Therefore, it wrongly expects people to act for the common interests. It assumes that cooperation, not competition will create a better result for everybody. However, it fails to give an incentive better than self-interest to push people for cooperation and collaboration. Meanwhile, socialism relies on the minds of a few selected instead of the collective mind of the market. a. Free Market and Capitalism Capitalism and the market system are not the same thing. It is true they are like twins. It might be hard to imagine capitalism without the market system with the exception of state capitalism. However, it is possible to have a market system without capitalism. For instance, Chinas current economic system is defined as market socialism meaning that the socialist government uses a market mechanism for its socialist economic policies. The history of the market system goes far beyond that of capitalism. However, capitalism is credited with the free or competitive market system. Capitalism is much more than a free market system. It is an ideology that makes money (capital) the central purpose of life for individuals. In Karl Marxs terms, Money degrades all the gods of man -- and turns them into commodities. Money is the universal self-established value of all things. It has, therefore, robbed the whole world -- both the world of men and nature -- of its specific value. Money is the estranged essence of man's work and man's existence, and this alien essence dominates him, and he worships it.19 In this sense, the main goal of a capitalist is to accumulate/gain money. Such a person considers money as a god who could open any door. In Marxist terms, capitalism is an ideology, which has turned money into the god of the world. It is a secular ideology, which promises to build a Paradise in this life, not in the next life as promised by many religions. Capitalism relies on the magical power of the free market mechanism to fulfill its promise of paradise. b. Self-interest and free market Adam Smith, the father of capitalist ideology, explains the invisible hand behind the market mechanism based on the concept of self-interest. According to Smith, it is just human nature to act on self-interest: Every man is, no doubt, by nature first and principally recommended to his own care; and as he is fitter to take care of himself than of any other person, it is fit and right that it should be so. Every man, therefore, is much more deeply interested in whatever immediately concerns himself, than in what concerns any other man. 20 From his understanding of human nature, Smith concludes that 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.21 In the Wealth of Nations, Smith argues that in order to enhance wealth, every man should be "free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of ... other(s)."22 In the market system envisioned by Smith, people specialize and exchange goods and services with each other not because they care about one another, but because they care about their best interest. They are better off if they have a division of labor in production. Smiths view of free market mechanism based on self-interest remains applicable to this day. However, the source of self-interest is still unknown. In my view, self-interest relies on two key elements of human nature. Self refers to
19

Karl Marx and H. Lederer, On the Jewish Question, Cincinnati, Ohio: Hebrew Union College-Jewish Institute of Religion; 1958. 20 Adam Smith, The Theory of Moral Sentiments, Oxford England: Clarendon Press; 1976, pp.82-83. 21 Ibid., pp.26-27. 22 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Chicago; London: Encyclopedia Britannica, 1990, p.687. 7

ego and interest refers to the desires of animal spirits. According to Adam Smith, the market mechanism determines what and how much to produce if we simply let everyone act based on his or her self-interest. Individuals will demand and supply the optimum amount of goods and services to boost their ego and fulfill the desires of their animal spirits. Thus, supply and demand driven by self (ego) and (animal spirits) interest work like an invisible hand pushing the market mechanism toward an efficient production and consumption. Therefore, the governments role is limited to a few areas such as security, national defense, and justice. Furthermore, the free market mechanism could even provide some of those services if it is allowed. The ultimate purpose is to let the market system produce all goods and services, if possible. Perhaps, with a strong lobbying power, the market system can even run the government. In a capitalist system, through the division of labor, self-interested people use limited resources in a more efficient way compared to other systems. The desire to fulfill personal interests for each individual ultimately produces the best result for everybody. In essence, the capitalist system ignites the greed of the animal spirit in each individual to always ask for more.23 Then, the system makes people work hard to produce goods and services to fulfill their desires. Meanwhile, it uses the level of production and consumption per person to boost human ego. It is fair to say that capitalism has succeeded because of its recognition and even exploitation of the self-interested human nature. Socialism assumes that humans are essentially social beings; therefore, it gives priority to social interests over self-interests. It invites individuals to make sacrifices for the common good. However, it does not provide great moral values needed for such sacrifice. Rather, it destroys sacrificing values which are promoted by religions. In this regard, socialism failed because of its denial of self-interested human nature. On the other hand, capitalism has succeeded because of its understanding of self-interested human nature. That is the reason why China has experienced phenomenal economic growth after learning from her mistake and using the market mechanism driven by self-interest. c. Rationality and free market Free market capitalism assumes that individuals make rational decisions to maximize their interests. In other words, they use their minds to make the best decisions for themselves. A rational person will choose the desirable option if he is provided the freedom to do so. In other words, if such a rational person thinks action A will result in X and action B will result in Y, and if X is more desirable (or more valuable) in the eyes of that person, he will choose A over B. It will not be rational for that person to choose B. The capitalist system assumes both consumers and producers are rationally seeking to maximize their utility in the market system. They reveal their rational decisions through their own preferences. Indeed, according to the rational choice theory, people only take drugs because drugs maximize their utility. Since the time of Adam Smith, David Ricardo, and Alfred Marshall, the capitalist system has assumed that competition in the marketplace among economic participants is governed by their rational self-interest. Therefore, they are against government intervention with a few exceptions. Rational choice theory suggests that our preferences are the outcome of our rational deliberations for maximizing our expected utility. It assumes that we weigh the expected benefits and costs of the choices we have and choose the one that brings the highest net expected benefit (utility). Subjective expected utility takes this assumption further and argues that consumer behaviors are a function of expected outcomes and their assigned values. Rational choice theory is widely used across many social science fields, including economics,
23

George Akerlof and Robert Shiller, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, Princeton: Princeton University Press; 2009; Dan Ariely, Predictably Irrational, The Hidden Forces That Shape Our Decisions, 1st edition, New York: Harper; 2008. 8

in which cost-benefit analysis and utility maximization are nothing more than a quantitative form of the Rational Choice Model.24 The mainstream economic theory of consumer preferences assumes that consumers rationally maximize their utility in the market based on the available income, price of goods, and their tastes.25 The theory suggests that consumers are rational in their decisions. This is the same assumption embedded in the Rational Choice Model. The Rational Choice Model is also used to explain consumer preferences for non-marketed goods, such as time, gifts, appreciation, charity, etc. Beginning with the works of Nobel laureate Herbert Simon debates erupted among economists about whether or not people are actually rational in their decisions. 26 Ultimately, they would move from perfect rationality to bounded rationality under certain circumstances. Bounded rationality means that people are not perfectly rational. Their rationality is limited by the information they have, the cognitive limitations of their minds, and the time they have to make decisions. Even though eventually most economists acknowledge that we are not always rational, they have resisted incorporating this change into economic modeling and expectations. With the works of some psychologists such as Dan Ariely, it seems like we are moving further away from rationality theory. Ariely argues that we are not only irrational but that we are predictably irrational.27 d. Utility maximization and free market The mainstream happiness model in capitalism stems from Jeremy Benthams utilitarian view. In his book, Introduction to the Principles of Morals and Legislation, Bentham argues that the utility principle is the main determinant of human behaviors. Individuals act according to the utility principle and try to maximize their utilities by calculating the expected pain and pleasure of their behaviors. Bentham came up with the utility principle based on his understanding of human nature as follows: Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do, as well as to determine what we shall do... They govern us in all we do, in all we say, in all we think: every effort we can make to throw off our subjection, will serve but to demonstrate and confirm it. In words a man may pretend to abjure their empire: but in reality he will remain subject to it all the while.28 In other words, humans act in order to gain pleasure or avoid pain from anything they do. Bentham argues that it is impossible to change this human nature. If this is true, it is not difficult to understand why human beings act in this zero sum strategy to maximize pleasure by minimizing pain. Individual decisions are shaped by the utility principle which approves or disapproves of every action whatsoever, according to the tendency which it appears to have to augment or diminish the happiness of the party whose interest is in question: or, what is the same thing in other words, to promote or to oppose that happiness.29 Bentham stresses that every action we take is shaped by the utility principle. He defines utility as property in any object, whereby it tends to produce benefit, advantage, pleasure, good, or happiness or to prevent the happening of mischief, pain, evil, or unhappiness to the party whose interest is considered: if that party be the community in general, then the
24

Gary Becker, The Economic Approach to Human Behavior, Chicago; London: University of Chicago Press; 1978; Elster J., Rational Choice, Washington Square, N.Y.: New York University Press, 1986. 25 Campbell Mcconnell and Stanley Brue, Economics: Principles, Problems, and Policies, Boston: Mcgraw-Hill, 2008. 26 Herbert Simon, Models of Bounded Rationality, Cambridge, Mass.: Mit Press, 1982. 27 Dan Ariely, Predictably Irrational, the Hidden Forces that Shape Our Decisions. 28 Jeremy Bentham, An Introduction To The Principles Of Morals And Legislation [Electronic Resource]: Dover Publications, 2007, p.14. 29 Ibid., p.14. 9

happiness of the community: if a particular individual, then the happiness of that individual.30 Bentham uses utility, pleasure, happiness, and well-being interchangeably. Utility maximization means to maximize pleasures and minimize pains. According to Bentham, individuals, driven by their nature, make this calculation in order to maximize their utility. This is also true for society which is formed by individuals. As individuals act on their nature and try to maximize their utilities, lawmakers should also follow the utility principle and try to maximize utility for the society. According to Bentham, for both individuals and society, the determinant of legal/illegal, wrong/right, good/bad is pain and pleasure. Everything is done to please these two masters. For Bentham, it is human nature to pursue pleasure and avoid pain. For Adam Smith, it is human nature to act based on self-interest. However, neither elaborates on human nature. Human nature is like a black box from which key assumptions in capitalist market system are derived. In my opinion, it is imperative to examine this black box in order to understand the failure of capitalism to bring sustainable consumption and subjective well-being. My theory of human nature is an attempt to unlock this black box of human nature.

KNOWING SELF FOR KNOWING THE MARKET As explained above, self-interest, rationality, and utility maximization are key concepts in explaining the merits of a free market economy. It is assumed that individuals know who they are and what is in their best interests. Thus, if we let them make their own decisions, they will act to maximize their utility. From an Islamic perspective, there is a fundamental flaw in such assumptions because it is not easy to know ones self. The key purpose of the Divine Revelation, Muslims believe, is to let us know who we are and what is in our best interests. That is why the very first message from God to the Prophet Muhammed (pbuh) (and humanity) was not believe! or worship! It was iqra (read!). It is reported that the Archangel Gabriel came to the Prophet when he was in isolation in a cave. The angel commanded him to 'read'(recite). The prophet replied 'I cannot read.' At this time the Archangel took Muhammad (pbuh) in his arms and pressed him until it was almost too much to bear. He then released him and said again 'read'(recite). 'I cannot', replied the prophet, at which the Archangel embraced him again. For the third time the Archangel commanded Muhammad (pbuh) read, and he again replied that he could not. The repetition of the command might be seen an instruction of how and what to read (recite). In this context, the first read refers to the necessity of the Divine light; the second read refers to the necessity of the Divine instruction; and the third read refers to the book of the universe. In other words, the angel was implicitly saying to the Prophet that he could read (recite) the book of the universe with the Divine light of the Quran under the Divine instruction. On releasing him the third time, however, the Archangel Gabriel said explicitly what and how to read: Read in and with the Name of your Lord, Who has created Created human from a clot clinging (to the wall of the womb). Read, and your Lord is the AllMunificent, Who has taught (human) by the pen Taught human what he did not know (The Qur'an , 96:1-5) 31 By referring to the creation of humans, the message was clear on where to start reading the vast book of the universe. As depicted in Chart 1, according to the Quranic message, we should start reading ourselves first after which we would be able to read the universe. However, we can read ourselves only in the name of God, meaning with His infinite light and guidance. In this regard, the Quran is a study guide which shows how to read the book of the universe. However, the Quran is not in delusion regarding the human response. It rightly
30 31

Ibid., pp.14-15. All verses from quoted in this paper are from the following translation: The Qur'an with Annotated Interpretation In Modern English, by Ali Unal, The Light, Inc.; 2008, also available on http://mquran.org/. 10

predicts how people will respond to this Divine call: No indeed, but (despite all His favors to him), human is unruly and rebels. In that he sees himself as self-sufficient, independent (of his Lord). But to your Lord, surely is the return (when everyone will account for their life). (The Quran, 96:6-8) In other words, according to the Quran, seeing himself as self-sufficient is the primary cause of the human denial of God. Chart.1

Following the Divine instruction, many Muslim scholars such as Gazhaali32, Rumi33, and more recently Nursi, 34 set off on a long journey to their inner universe in order to understand who we are and what are the key elements of our nature. Relying on their monumental discoveries, I will attempt to come up with a theory of the inner universe of humans.

A NEW THEORY OF HUMAN NATURE A major flaw in capitalist ideology comes from its emphasis on the external (physical) world at the cost to the internal (psychological and spiritual) world. Yet, each human being is like a universe. In other words, each human is a miniature universe. Therefore, studying the universe within is as important as studying the outer universe. Indeed, the inward journey to discover the inner universe is more challenging than the outward journey to discover the outer universe. In my view, both the financial and happiness crises in capitalist countries are due to the lack of comprehensive understanding of the inner universe. Inspired largely by the writings of some Muslim scholars such as Al-Ghazali, Rumi, and Nursi and Western scholars such as Plato, Jung, Haidt, Kaser, and Schelling, I would like to present a new theory of human nature, A Grand Theory of Inner Universe (GTIU), using the palace and resident metaphors that follow. If we compare the human body to a palace, the elements of his nature will be like the residents of the palace. Indeed, there are many residents (selves) competing with each other in this palace. In this sense, I takes the plural form. We could not start with I to express our view or desires. Since there are many residents, we could not speak in a singular form anymore. Authentic happiness could be possible if we listen to voices of all residents and try to fulfill their needs and desires in a balanced way. We could not be truly happy if we listen only to one of them while disregarding the rest. We should get to know each resident in terms of their needs, desires, and enemies. Thus, we could fulfill responses to their requests in a better way in order to satisfy and protect them. In many ways, the residents of our body are quite similar to the members of a family living in the same house. As the peace and happiness of the entire family is possible if each
32

Al-Ghazali on Disciplining The Soul: Kitab Riyadat Al-Nafs; & On Breaking the Two Desires: Kitab Kasr AlShahwatayn: Books xxii and xxiii of The Revival of The Religious Sciences: Ihya Ulum Al-Din. Cambridge: Islamic Texts Society, 1997. 33 Rm (Jall Al Dn Rumi), Maulana, The Masnavi, Book One and Two. Oxford; New York: Oxford University Press, 2004 34 For this paper, I benefited from the four followings books of Said Nursi: The Words, The Rays, The Flashes, The Letters, Istanbul: Sozler Publications, 1996. 11

family member lives in peace and prosperity, the inner peace of a person is also possible if each resident of his palace lives in peace and prosperity. Making one family member happy, but leaving the rest of the family in misery is not true happiness at the family level. Likewise, making one resident of the human palace happy but leaving the rest in misery is not a real happiness. In my opinion, most crises in capitalist nations are driven by the misunderstanding of human nature. If we could come up with a comprehensive human nature theory, we could better predict, even prevent, all kinds of crisis that originate from human nature. Since ancient Greece, there have been many explorations about human nature in the eastern and western worlds. In the twentieth century, Carl Jung tried to define the collective unconscious of humanity through what he called archetypes.35 Indeed, Jung argued that we are all connected with our fellow humans and with nature through the collective unconscious. In this regard, Jungs archetypes are like a big ocean which connect individual islands of human society. The key elements of human nature presented in this paper are both similar to and different from Jungs archetypes. They are similar in the sense that both are universal. The residents are not like archetypes. However, they could be considered the source of some of Jungs archetypes. In this section, using the palace and the residents of that palace as metaphors, I will discuss the following key elements of human nature according to GTIU: king, judge, elephant, advisor, and guard. The king is the spiritual heart that is the source of love and inspirational knowledge. The judge is the conscience that is the source of positive feelings experienced after performing good things and negative feelings experienced after doing bad things. The advisor is the mind, which is the source of rational decisions. The elephant is the animal spirit, which is the source of animalistic desires. The guard is the ego (or self) that gives us feelings of possession, power, and control. 1. King: Spiritual Heart Metaphorically speaking, the spiritual heart of an individual is like the king in a human palace. The king has almost infinite capacity to love. He needs a lover with beauty, perfection, and generosity. This is because of the nature of love, which is satisfied with beauty, perfection, and benefits (gifts). The king uses his capital of love to make attachments in his search of the true lover. Indeed, in one way, our life is just a journey of making attachments to satisfy the king. The spiritual heart resembles the king because without his satisfaction, life would become tortuous. Indeed, without any meaningful attachment, it would be hard to justify life over death. Therefore, the king should be given a high priority. All other residents should ultimately serve the king. First and foremost, we should take care of the needs and desires of our inner king. We should know what he desires. We should also protect him from any danger. As the king gains pleasure by making attachments though love, he also suffers from any detachment from his lovers. Indeed, as shown by some studies, the pain of detachment is greater than the pleasure of attachment because of the endowment effect.36 In other words, people establish ties with what they have. Therefore, their pains of losing their possessions exceed the initial pleasure of gaining the very same possessions. For instance, the pain of losing $500 in lottery is greater than the pleasure of gaining $500. In Nursis view, the only way to satisfy the king is to find God who is Al-Wadud which means the source of all love and the one worthy of infinite love. As the Quran says, it is in the remembrance of, and whole-hearted devotion to, God that hearts find rest and
35

Carl Jung and Hull R., The Archetypes and the Collective Unconscious, [Princeton, N.J.]: Princeton University Press, 1980. 36 Kahneman D., Knetsch J., Thaler R., Experimental Tests of The Endowment Effect and the Coase Theorem', Journal of Political Economy, 98 (6), pp.1325-48. 12

contentment (The Quran, 13:28) In other words, the human heart will find the essential qualities of love in God. He will love everything in the name of God or as the mirror of the beauty and perfection of God. Thus, his love for everything will be part of the love of God. On the contrary, materialism detaches the heart from Al-Wadud, instead, offers alternative objects of love which posses limited beauty and perfection. However, it fails to bring happiness despite unprecendentent amount of wealth production. With more and more consumption, people are achieving less and less happiness, 37 This is what some researchers call the Progress Paradox38 or the American Paradox.39. I refer to this as the Capitalist Paradox because it is quite common in developed capitalist countries.

2. Judge: Conscience Conscience, which is defined as the ability to distinguish right from wrong, is like an inner judge in the human palace. The judge makes judgments about an individuals decisions in life. If we treat someone unfairly, the inner judge causes us to be aware of this injustice and to feel guilty for being unfair to others. A recent experiment by the Brain Research Center of the Russian Academy of Sciences confirms the existence of an inner judge mechanism present in human beings. According to Svjatoslav Medvedev, the director of that center, "There is a mechanism in our brain which informs us that we have done something wrong. This mechanism launches the phenomenon known as remorse. And it is actually our remorse which makes us hate our conscience. That is why a lot of people try to get rid of it. And the most popular and available way to get rid of conscience is alcohol."40 Furthermore, the judge is affected by perceived unfairness in his community or the broader society. He desires fairness in relationships and seeks equitable social arrangements in which the individual trusts and is trusted by other members of society. Feelings of inner peace exist when community norms and social policy reflect values consistent with those of the judge. In order to make the inner judge happy, an individual must develop a code of ethical behavior and consider fairness in every action. He or she avoids feelings of guilt by acting in an egalitarian manner toward others. Fairness is also important for the economy. Indeed, the lack of confidence arising from unfairness is a major factor driving down the economy. Therefore, during the time of economic recession, it is particularly important to restore confidence in the market. Albert Rees was a prominent labor economist who taught labor economics for many years before being appointed as the Director of the federal Council on Wage and Price Stability in the U.S. Shortly before his death, he confessed to the omission of fairness in neoclassical theory: Beginning in the mid-1970s, I began to find myself in a series of roles in which I participated in setting or controlling wages and salaries. In none of those roles did I find the neoclassical theory of wage determination I had been teaching for so long to be of the slightest help. The factors involved in setting wages and salaries in the real world seemed to be very different from those specified in the neoclassical theory. The one factor that seemed to be of overwhelming importance in all these real-world situations was fairness.41 In short, free market capitalism does not care about fairness in determining wage and price because it does not accept the fact that a human has an inner judge who makes constant assessment about the
37 38

Robert Lane,The Loss of Happiness in Market Democracies, New Haven, Yale University Press, 2000. George Easterbrook, The Progress Paradox: How life gets better while people feel worse, 1st ed. New York: Random House, 2003. 39 David Myers, The American Paradox : Spiritual hunger in an age of plenty, New Haven, CT: Yale University Press, 2000. 40 Russian Scientists Explore Human Conscience on Computer Screen, Brain Research Center of The Russian Academy of Sciences, available at: http://english.pravda.ru/science/tech/15-06-2009/107770-conscience-0, accessed on 12/15/09. 41 Albert Rees, The Role of Fairness In Wage Determination Journal of Labor Economics, 1993, vol.11(1):243. 13

world events. In addition to the inner judgment, Islam reminds people about the Day of Judgment and ask them to be just and fair in their personal, social, and business life. Therefore, in Nursis view, justice (adalah) is one of the four important messages given to humanity in the Quran, in addition to Tawhid, nubuwwah (prophterhood), and ahhirah (the hereafter).42

3. Elephant: Animal Spirit The elephant is an animal spirit in the human palace. In traditional Islamic literature, it is known as nafs. Al-Ghazzali calls it horse.43 He argues that if we spend all our time looking after it and feeding it, we would never get anywhere. Instead we should train and give it just enough attention so that it can carry us where we want to go. Jonathan Haidt, in his book, The Happiness Hypothesis, resembles animal souls to elephant. He suggests that we have a divided self which consists of a rider and an elephant. The rider is the reasoning part of the mind and the elephant is the part of self capable of receiving pleasure and pain. In Haidts terms, the rider is an advisor, or servant, not a king, president, or charioteer with a firm grip on the reins.44 Haidt defines life as a constant struggle between the elephant and the rider in a human palace. However, according to Haidt, it is the elephant that is in control of the palace, not the rider: It is really the elephant holding the reins, guiding the rider. The rider becomes a lawyer fighting in the court of public opinion to persuade others of the elephants point of view.45 In Nursis views, the nafs (the elephant) is addicted to pleasure.46 The elephant pursues instant gratification and selects present pleasure over any greater reward that could be achieved through deferment. Blind to the future, it wants to gain pleasure and avoid pain in the short-term with no ability to conduct long-term cost and benefit analysis. It is never satisfied with what it has and always asks for more. Due to the phenomena known as Hedonic Adaptation (a persons capacity of adjusting to changed circumstances), it is very adaptable to its current situations. It ceases to appreciate what it has and always looks for new sources of pleasures. It does not want to be restricted in any way. If left alone, it goes completely mad and consumes anything, which fulfills its instant gratification. Indeed, according to Haidt, the elephant cares about instant pleasure and prestige, not happiness.47 In Nursis view, one of the key purposes of Islam is to provide restraint and control of the elephant, guide and train him, rather than being his slave. Nobel laureate Thomas Schelling also extensively writes on the multiple selves fighting within us to take control of the human palace. 48 In discussing how people think, behave, and act, Shelling suggests that people do not always follow the rational-utilitarian approach. Given the nature of the animal souls/ the elephant, it is not surprising that people fail to act based on their rational choices they made before.

4. Advisor: Mind The mind, which consists of intellect, logic, and memory, serves as an advisor to the king, the
42 43

Said Nursi, The Signs of Miraculousness, Sozler Publications, Istanbul. Al-Ghazali on Disciplining The Soul: Kitab Riyadat Al-Nafs, 44 Haidt, The Happiness Hypothesis, p.17. 45 Haidt, The Happiness Hypothesis, pp.21-22. 46 Nursi, The Words, Sozler Publications, Istanbul. 47 Haidt, The Happiness Hypothesis, p.22. 48 Thomas Schelling, Choice and Consequence: Perspectives of An Errant Economist, Cambridge, Mass.; London: Harvard University Press; 1984. 14

ruler of the human palace. If the elephant is in power, the advisor will serve it by providing guidance on available choices for pleasure. The mind also advises the king (heart) and the judge (conscience). However, if it is too busy helping the elephant, it might not find time to serve the king and the judge. The advisor is capable of exploring outer and inner universes if requested. Indeed, he is thirsty for knowledge and meaning. He asks some enduring questions and enjoys learning their answers. He is capable of making rational decisions for other senior residents such as the king, the elephant, and the judge. However, he has no power to endorse his decision. He might be silenced if the elephant is too strong. Indeed, free market capitalism turns the mind into an advisor to the elephant. It also controls minds through money. In other words, even great minds do not work freely to determine what they want to do. Instead, they are being directed by money, which is largely used as means to fulfill the desires of the elephant. 5. Guard: Self The ego or self is like a guard in the human palace. The guard is the source of self-awareness and serves as a conduit for relationships with other human beings and the external environment. He is in charge of the palace. He is aware of his possessions and protects them from intruders. He directs all residents of the palace to serve to the elephant and the king. He enjoys working for the elephant because of the recognition he receives from the activities of the elephant. He is the reference point to know other people and the outer universe. The guard determines our relationship with the inner and outer universe through four types of relationships. 49 First, he tries to know himself. This is the subject-subject relationship. He thinks about himself, comes to understand the self, becomes proud of the self, and loves the self. Second, he tries to know about the universe by using self-knowledge as the reference point. This is a subject-object relationship. Third, he tries to know other selves. Fourth, he attempts to understand the notion of God if he believes in Him. One aspect of the guard is the effort to understand the outer universe. Knowing the self will help to know the outer universe. As Aristotle said, Knowing yourself is the beginning of all wisdom. In Nursis view, the self is like a double edge sword. 50 If the self understands that he is not a real owner, but a trustee, he will offer thanks to the Real Owner and use his possessions in a responsible manner. In this case, he will be the key (reference) to the understanding of God and the universe. However, if the self (the guard) claims real ownership and gains too much power in the human palace, he will act like a dictator trying to control other people and nature. Indeed, he might even claim to be a sort of God. Relying on his assumed power, he will attempt to oppress others for the elephants interests. He will deny/forget his inherent impotence and poverty, and demand for positional goods to show off how powerful and great he is. He will be like a showman in the palace. In modern consumer society, individuals are in a continuous process of constructing their personal identity through consuming material goods as social and cultural symbols. Cushman said that the empty self of a consumer is constantly in need of filling up through material consumption.51 Companies are quite successful in providing positional goods and services to conspicuous consumers. They do not sell just products; they sell brands, prestige, visions, dreams, associations, status, etc.52

49 50

Nursi, The Words (30th Word). Nursi, Ibid. 51 Cushman P., Why the Self is Empty: Toward A Historically Situated Psychology, American Psychologist, 1990;45(5):599-611. 52 Naomi Klein,No Logo: Taking Aim at the Brand Bullies, London: Flamingo, 2001. 15

THE PURPOSE OF LIFE FOR CONSUMERS VS. WORSHIPPERS From an Islamic point of views, serving self and animal soul could not be the purpose of life. Self is just a means to know God and become His servant (abdullah). In the West, since the Enlightenment, people have been told to believe in themselves instead of believing in god(s). The Enlightenment project turns the human self to a kind of inner god. It promotes self-belief, self-help, self-actualization, self-motivation, self-confidence, and selfsufficiency. It boosts the self by ascribing its accomplishments to the self. It transforms the self to the inner god.53 It sets the goal of conquering and mastering the universe for the inner god by defeating, controlling, or stealing from nature.54 However, it does not understand that the life of the inner god depends on the life of nature.55 In Horkheimer and Adornos terms, the system the Enlightenment has in mind is the form of knowledge which copes more proficiently with the facts and supports the individual most effectively in the mastery of nature.56 While the Enlightenment turned the self to an inner god, it also made him the slave of his desires/animal soul. He does everything to serve his desires. He sacrifices everything, even his own life, for the desires of his animal soul. 57 Indeed, a capitalist consumer views the ultimate goal in life to be the fulfillment of his/her desires. The common saying life is fun in the capitalist American society reflects this philosophy of life for many people. The overwhelming majority who embrace this philosophy work very hard during the week in order to have fun over the weekend.58 The Enlightenment project rejects any heavenly God, but embraces the earthly one. 59 It has created a secular trinity which consists of nature, cause-effect, and chance. It has also turned the human self to an inner god. In Nursis view, the main error stems from its understanding of human nature. In order to correct this mistake, we need to begin with
53

Mans likeness to God consists in sovereignty over existence, in the countanance of the lord and master, and in command. Myth turns into enlightenment, and nature into mere objectivity. Men pay for the increase of their power with alienation from that over which they exercise their power. Enlightenment behaves toward things as a dictator toward men. He knows them in so far as he can manipulate them. The man of science knows things in so far as he can manipulate them. (Max Horkheimer and Theodor Adorno, the Dialectic of Enlightenment, Continuum International Publishing Group, 1976.) 54 The following excerpt from Francis Bacon reflects the mindset of the Enlightenment thinkers on the power and purpose of gaining knowledge: no doubt the sovereignty of man lieth hid in knowledge; wherein many things are reserved, which kings with their treasure cannot buy, nor with their force command; their spials and intelligencers can give no news of them, their seamen and discoverers cannot sail where they grow. Now we govern nature in opinions, but we are thrall unto her in necessity; but if we would be led by her in invention, me should command her in action. (Bacon, In Praise of Knowledge, The Major Works, University Press, 2008.) 55 For the comparison Islam and the Enlightenment in terms of their understanding of human nature, science, and technology, please refer to my following article: Human Nature vs. the Nature of Science and Technology, in Henk Jochemsen (ed.) Our Common World. A Cultural Dialogue between Christians and Muslims about the Role of Technology in Our Global Society, Rozenberg Publishers, March 2010. 56 Max Horkheimer and Theodor Adorno, the Dialectic of Enlightenment, Continuum International Publishing Group, 1976, p.83. 57 With the help of the new science the only role left to man was to conquer and dominate nature and serve his needs as an animal endowed somehow with analytical reason and thought. (Seyyed Hossein Nasr, Man and Nature: The Spritual Crisis of Modern Man, ABC International Group, 1997, p.72) 58 The well-known movie, The Matrix, is a good description of the world created by capitalism. The Matrix is defined as follows by Morpheus, a key actor in that movie,: It is an illusionary world. It is all around us. Even now in this room. You can see it when you look out of your window, or when you turn on your TV. You can feel it when you go to work, when you go to church, when you pay your taxes. It is the world that has been pulled over your eyes to blind you from the truth. That you are a slave. Like everyone else, you were born into bondage, born into a prison that you cannot smell or taste or touch. A prison for your mind. 59 Man wants to dominate nature not only for economic motives but also for a mystique which is a direct residue of a one-time spiritual relation vis--vis nature. Men no longer climb spiritual mountainsat least rarely do so. They now want to conquer all mountain peaks. (Seyyed Hossein Nasr, Man and Nature: The Spritual Crisis of Modern Man, ABC International Group, 1997, p.19) 16

ourselves. We need to discover our inner universe. Once we do that, we will understand that we are not self-sufficient, but that our existence is contingent on a higher being. Therefore, we cannot sustain ourselves. We need to rely on Divine power and mercy at every moment. We are infinitely needy creatures. Our life depends on the entire universe. Our desires are as big as our imagination. However, we have absolutely no power to fulfill our needs and desires. We are like a completely paralyzed person. In reality, we cannot even feed ourselves because we do not have control over our digestive system. It is the Divine power working within us. It is the Divine mercy providing everything for us. Therefore, in Nursis view, we should give up arrogance and become truly humble. We should transcend our self-interests and ego, and serve the common interests. As shown in Chart 2, the oneness of God (Tawheed)60 becomes the source of ontologicalepistemological knowledge. In other words, the Tawheedi paradigm provides the unity between ontological and epistemological level of reality. Therefore, there is no dichotomy between the revealed knowledge and reasoned knowledge. 61 While the former comes from the Divine Words (Al-Kalaam), the latter comes from the Divine Power (Al-Kudrah). They are just the different expressions of the same reality which comes from the One (Al-Ahad and AlWaheed). Therefore, there should be no contradiction between scientific and religious truth. From an Islamic point of view, as seen in the diagram below, it can be said that God makes Himself known to humanity through His words and works. If we listen to the Divine Revelations and read His works in the universe, we will know His attributes. We should begin our reading from ourSELVES because the knowledge of the self will help us to know God. Once we understand that we are absolutely impotent and needy, we will realize that nature could not produce anything on her own. Everything from an atom to galactic systems is the works of God and under His control at every moment. He is not the god of gaps. He is the God of everything at every moment according to the Quran. Therefore, becoming a believer is nothing more than the recognition of and participation to the universal submission. In this regard, belief is not a blind acceptance; it is an affirmation and bearing weatness (shahadah) to the manifestation of God.

60

Tawhid is the epistemology of the Oneness of God which becomes the foundation of the unity of knowledge. God is the source and beginnig of all knowledge. In other words, this is to accept the divine roots of knowledge as the primal foundation of all knowledge, hence of all configurations of world-systems. Masudul Alam Choudhury, The Universal Paradigm and the Islamic World-System, World Scientific Publishing Co., 2007, p.24. 61 while from the point of view of the One, the Absolute, there is no otherness or separation. All things are one, not materially and sustanstially but inwardly and essentially. Again it is a question of realizing the levels of reality and the hierarchy of the different domains of being. (Seyyed Hossein Nasr, Man and Nature p.30) 17

GOD
(All-powerful, All-knowing, All-wise, All-present, Mostholy, Most-merciful)

Works (ontological knowledge)

Bearwitness / Submit / Appreciate

Words (epistemological knowledge)

The universe
(Macrocosmos)

The self/human
(Microcosmos)

Messengers

Messages

power/knowledge bounty/mercy

Zero power Zero property

A believer Read Realize Humble Honest Thankful Peaceful Caring Sharing Praying

Read in and with the Name of your Lord, Who has created human from a clot clinging (to the wall of the womb). Read, and your Lord is the All-Munificent, Who has taught (human) by the pen. Taught human what he did not know. No indeed, but (despite all His favors to him), human is unruly and rebels, In that he sees himself as self-sufficient, independent (of his Lord). But to your Lord, surely is the return (when everyone will account for their life).(Q96:1-8)

Remember

Respond

Chart 2. Tawheedi Paradigm and Ontological-Epistemological Unity of Knowledge

According to the Quran, as everything in the universe is created for a certain purpose, human beings are also created for certain purposes. The main purpose of humans is not to boost the self, turning him to an inner god. The purpose is also not to serve the elephant by becoming its slave. Rather, the purpose is to understand our nature embedded with infinite impotence and poverty, and act accordingly. It is to disclose our almost infinite potential by relying on the Divine power and mercy through understanding our true nature. In other words,
18

the purpose is to become a perfect human, insan-i kamil, by disclosing our human potentiality as much as we can. 62 A story told by the 13th century poet Rumi fits well in explaining what the Enlightenment has done to human potential. In his masterpiece Mathnavi Ma'navi, "Spiritual Couplet", Rumi compares the human to a gooses egg along with many hens eggs placed under a hen for incubation. Even though the chick from the gooses egg will become a goose, if she imitates her siblings, she can only walk. However, if she becomes aware of her potential, she can walk on the ground, swim in the water, and fly in the air. Similarly, if we truly become aware of the key elements of our nature, we can have many different experiences and reach a higher level of enjoyment in our life. For that matter, life is not fun even though there is room for fun in life. Rather, life is a test. We have surely made whatever is on the earth as an ornament for it (appealing to humanity), so that We may try them (by demonstrating it to themselves) which of them is best in conduct. Yet, We surely reduce whatever is on it to a barren dust-heap (and will do so when the term of trial ends). (Quran, 18:7-8) Therefore, material possessions cannot be the goal in life; they can only be a means of accomplishing the ultimate goal of disclosing our potential. For a believer the present, worldly life is nothing but a play and pastime, and better is the abode of the Hereafter for those who keep from disobedience to God in reverence for Him and piety (Quran, 6:32) As depicted in Chart 3, from an Islamic point of view, a person who understands his innate weaknesses would not make the claim of being the master over other beings. Rather, he will be humble and will live in harmony with everything. He would not claim ownership over anything. He will understand that nothing, including his body, is his own. Everything belongs to the Master of the universe. He is a trustee over what he possesses. In Nursis view, belief is a sales contract between a believer and God. Verily God has purchased from the believers their persons and their property that Paradise might be theirs (Quran, 9:11). While capitalism encourages people to buy and consume, meaning to own and use what they like, Islam tells people to sell what they have, meaning to know that they are not real owner. Therefore, a believer could not use what he has as he wants. He could only use them with the permission of the real Owner. He has to use them responsibly. His acts are being recorded and he will be held accountable on the Judgment Day. And so, whoever does an atom's weight of good will see it; and whoever does an atom's weight of evil will see it. (Quran, 98:7-8) Chart.3

62

The purpose of mans appearance in this world is, according to Islam, in order to gain total knowledge of things, to become the Universal Man (al-insan al-kamil), the mirror reflecting all the Divine Names and Qualities. (Seyyed Hossein Nasr, Man and Nature p.96) 19

FREE MARKET ECONOMY AND HUMAN NATURE Free market economy relies on three elements of human nature: ego (self), animal spirit (interest), and mind (rationality). The success of capitalism comes from so-called rational decisions made by capitalist entrepreneurs who try to maximize their profits and consumers who try to maximize their pleasures (utilities) in the market system. Capitalist ideology gives the following message to people: the ultimate goal in life is to have fun and power. Consumers need to work hard to become rich in order to have fun and gain admirable images. Capitalist entrepreneurs try to maximize their profits by creating demand for their goods and services, and minimizing the cost of their production. By using all kinds of advertisements, they ignite animal spirits and egos, thus creating demand for their products. On the other hand, by rewarding workers, they increase labor productivity and minimize the cost of production. The producers goal of profit maximization overlaps with the consumers goal of pleasure (utility) maximization. While one side tries to maximize profit, the other side tries to maximize pleasure. People work very hard five days a week in order to buy goods and services and entertain themselves over the weekend. Supply from producers and demand from consumers work like an invisible hand that shape market activities and, in theory, make people happier. Since this mechanism is supposed to produce the best possible outcomes, government intervention is not desirable because it will create distortions. Although free market capitalism has worked smoothly for the most part since Adam Smith, it has also witnessed many economic crises. In my view, economic and financial crises of capitalism are driven by the excessively ignited desires of animal souls and ego.

Human Nature and the 2008 Global Financial Crisis It is impossible to avoid the economic crisis like the one we are currently experiencing without having a complete and comprehensive understanding of human nature. Knowing human nature will help us to make workable assumptions about human behaviors, thus making it possible to conduct more robust macro and micro economic analysis. Otherwise, our economic models and predictions based on wrong assumptions are doomed to fail. That is why Alan Greenspan, one of the many people blamed for the current crisis, defends himself by saying that we should blame human nature for the crisis: The economic edifice market capitalism that has fostered this expansion is now being pilloried for the pause and partial retrenchment. The cause of our economic despair, however, is human natures propensity to sway from fear to euphoria and back, a condition that no economic paradigm has proved capable of suppressing without severe hardship.63 He argues that it is impossible to prevent such crises because it is hard to predict and prevent certain human behaviors coming from their ambiguous nature. Alan Greenspan, in a TV interview, also argued that what brought everything down is sheer greed behind human nature.64 In my view, the bankers knew they were being hasty; they knew that the rosy days will not last forever. However, they proceeded in order to make more money for their shareholders and attained higher bonuses. Greed was the driving force. I made a mistake," Greenspan said to the House Committee on Oversight and Government Reform, "in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms." 65
63

Alan Greenspan, The world must repel calls to contain competitive markets, Financial Times, August 4, 2008. 64 An interview conducted with Alan Greenspan on the US cable TV business channel, CNBC, April 8, 2008. 65 Greenspan and Co. Describe Wall Street 'Tsunami', The Washington Post, October 23, 2008. 20

I agree with Greenspan that the current financial crisis, and indeed all economic crises, is driven by human nature. However, I disagree with him that human nature is not predictable. I think the capitalist theory of human nature has some serious flaws. If we could come up with a comprehensive human nature theory, we could better predict, even prevent all kinds of crises that originate from human nature. Indeed, there were some economists who did foresee a major economic crisis. For instance, Robert Shiller, also known as Mr. Bubble, accurately predicted the dot-coms bubble and housing bubble. In his book, Irrational Exuberance, he argues that irrational exuberance is the cause of bubbles in stock markets and housing markets.66 In an interview, Shiller acknowledged that with the encouragement of his wife, who is a clinical psychologist, he came to the understanding that psychology is at the heart of economics.67 In the middle of the Great Depression, John Maynard Keynes published his famous book, The General Theory of Employment, Interest and Money. He offered a lasting prescription for any economic recession. Even though many economists have adopted his views of government intervention as an effective means to deal with economic recession, they have somehow dismissed his fundamental message on how the economy functions. In his book, Keynes argued that economic crises are generally caused by animal spirits: "Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."68 In their recently published book, Animal Spirits, George Akerlof and Robert Shiller argue that without understanding and modeling human nature correctly, it is impossible to prevent economic crisis like the one we are currently experiencing. They harshly criticize economists who do not blame animal spirits for the sake of the free market. They call for the inclusion of human nature into macroeconomics in order to determine the right government policies to prevent future economic crises. They agree with Greenspan that unpredictable human nature should be blamed for the current crisis: People began to buy housing as if this were their last chance ever to buy a house (because they thought prices would continue to escalate beyond their means), and speculators began to make investments in housing, as if other people were going to think that they should buy now, at almost any price, because they would not be able to afford to buy a house later. 69 Akerlof and Schiller also argue that ignoring animal spirits in economic analysis prevents us from understanding how the economy really works. This makes it difficult to understand the loss of trust and confidence, the importance of fairness, the role of corruption and the sale of bad products in booms, and the role of stories that affect peoples decisions. 70 In short, the current crisis is mainly due to the irrational decisions made by consumers, bankers, and politicians. What caused them to make such mistakes was their nature. Therefore, we should understand human nature in order to understand and prevent economic crises. My theory, GTIU, does exactly this. It does not assume that people are irrational in general. It simply recognizes that people are imperfect decision makers because of influences
66 67

Robert Shiller, Irrational Exuberance, 2nd Ed. Princeton, N.J.: Princeton University Press, 2005. Leonhardt D., They Called Robert Shiller Mr. Bubble, Yale Alumni Magazine, 2009 (September/October). 68 John Keynes, The General Theory of Employment Interest and Money, New York: Harcourt, Brace; 1936, pp.161-162. 69 George Akerlof and Robert Shiller, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, p.169. 70 Ibid., p.167. 21

from the elephant (animal soul) and the guard (ego). Even though they make rational decision most of the time, they predictably make irrational decisions under certain circumstances in which the elephant and/or the guard are in control of the palace. We frequently face choices between immediate and delayed gratifications. The awareness of the elephant and the guard within human nature will help us to increase our rational decisions in life.

(HOW) CAN ISLAMIC ECONOMICS/FINANCE HELP? There have been growing interests in Islamic finance after the 2008 financial crisis. Even Daily Vatican newspaper, 'L'Osservatore Romano, published an article suggesting the principles of Islamic finance as a possible solution to the financial crisis. The paper said, Western banks could use tools such as the Islamic bonds, known as sukuk, as collateral. 71 Loretta Napoleoni, the author of Rogue Economics, argues that Islamic principles counter balances financial structures to Rogue Economics by excluding many market activities in which rogue entrepreneurs proliferate.72 As discussed before, in my view, the main cause of most economic and financial crises in capitalism stems from its misunderstanding of human nature which nourishes irrational and irresponsible behaviors. Therefore, with its moral and regulative restraints based on its comprehensive assumptions of human nature, Islam can offer a valuable contribution to the international economic and financial system in several ways. First of all, the Islamic worldview is based on the Tawhed (the oneness of God). God is not an abstract term; He is the source of ontological and epistemological knowledge. The ultimate goal is not to maximize utility through gaining greater pleasures; rather, it gains the pleasures of God through living a morally and spritually fulfilled life. Islam defines a comprehensive human nature with several key residents as discussed before. The goal is to pursue the fulfillment of all residents in a harmonious way rather than to just serve the ego and the animal soul as promoted by capitalism. Metaphorically speaking, each resident of the human palace has a different taste. The elephant pursues sensual and emotional pleasures by pursuing all kinds of fun. The guard pursues egotistic pleasure through image enhancement and power. The advisor pursues intellectual pleasure. The king and the judge receive esthetical and spiritual pleasures through love, compassion, fairness, and belief. Capitalism results in unsustainable consumption because it focuses on the desires of the elephant and the guard while ignoring the needs of the king, the judge and the advisor. 73 Islam requires a major revision in the capitalist assumptions about human nature, goals, and behaviors. The ultimate goal is not to maximize utility through gaining greater pleasures; rather, it gains the pleasures of God through living a morally and spritually fulfilled life. Second, due to its understanding of human nature, not only does Islam accept irrationality of human behaviors, it also provides guidance in predicting these behaviors under certain circumstances. For instance, through the story of Prophet Joseph, the Quran warns believers about the desires of animal souls and difficulty of acting according to their mind when their animal souls are in control.74 Islam provides moral principles to train animal souls and ego teaching about the bad consequences of greedy behaviors and irrational desires of animal souls.75 Islam also asks wealthy Muslims to help the poor through mandatory charity (zakah)
71

Lorenzo Totaro, Vatican Says Islamic Finance May Help Western Banks in Crisis, Bloomberg news, http://www.bloomberg.com/apps/news?pid=20601092&sid=aOsOLE8uiNOg&refer=italy, accessed on February 10, 2010. 72 Loretta Napoleonis presentation on Islamic finance is available at the following website: http://www.lorettanapoleoni.com/?p=63, accessed on February 10, 2010. 73 Necati Aydin, Subjective Well-being and Sustainable Consumption, The International Journal of Environmental, Cultural, Economic and Social Sustainability, Volume 6, Issue 5, pp.133-148. 74 "Yet I do not claim myself free of error, for assuredly the human carnal soul always commands evil, except that my Lord has mercy (which saves us from committing evil acts) (The Quran, 12:53) 75 For instance, the Surat-ul Takaathur provides very vivid description of greedy nature of human beings: 22

and voluntary charity (sadaqah). It requires fairness and justice in business and personal relations. Third, Islam allows government intervention in personal life in the form of public awareness and guidance to warn people from their bad decisions. This is in line with the findings of some recent studies revealing the weaknesses in human judgment regarding short and long term preferences. For instance, conducting an experimental study on long and short term preferences, ODonoghue and Rabin found that people are more likely to make mistakes when deciding between long and short term choices. 76 They argue that short-term preferences are errors, not real preferences which should be respected. In fact, they think people are regularly harming themselves by deciding to consume more in the short-run. From an Islamic point of views, this is due to the existence of the unleashed animal spirit and the boosted ego (the guard). Fourth, Islam justifies government interventions in the market when players act irrationally and immorally under certain circumstances. The moral law is the basis for Islamic economics and finance, not egotistical self-interest.77 From an Islamic point of views, it is appropriate to intervene in peoples liberties to protect them from their own bad decisions. Of course the form of intervention is very important. Islam does not suggest an authoritarian system which makes decisions on behalf of the people for their best interests. Rather, Islam allows for government regulations and restrictions to prevent irrational and irresponsible behaviors. It aims to bring authentic subjective well-being through sustainable consumption. Fifth, Islam does not allow making money without taking any risk. Indeed, a key principle of Islamic finance, no risk, no gain, requires the risk/reward sharing for investors and consumers. As put by Umar Chapra, risk-sharing along with the availability of credit for primarily the purchase of real goods and services and restrictions on the sale of debt, short sales, excessive uncertainty (gharar), and gambling (qimar), which Islamic finance stands for, can help inject greater discipline into the system and, thereby, substantially reduce financial instability.78 Sixth, Islam offers some measures to prevent individuals from accumulating wealth and increasing their consumption without any contribution to the real economy. This is the main reason behind the prohibition of riba (interest) in Islam. People are not allowed to make money without directly or indirectly making contribution to production. In Quranic terms ..human has only that for which he labors (The Quran, 53:39). Likewise, people are discouraged to indulge in lavish consumption with their own money or through attaining credits. 79 Therefore, it would be better to popularize the Islamic modes of profit-and-loss sharing and sales- and lease-based modes of finance in Muslim countries not only to avoid interest but also to prevent the misuse of credit for personal consumption 80
Rivalry in worldly increase (seeking and then boasting of the acquisition of things, wealth, pedigree, and posterity) distracts you (from the proper purpose of life), until you come to the graves. (The Quran, 102:1-2) Then, the Surah refers to irrationality of greedy acts repeating three times that you do not truly know what you do when you are pursuing accumulation in a greedy manner: No indeed! You will surely come to understand it (when death comes to you)! Again, no indeed! You will surely come to understand it (when you are raised from the dead)! No indeed! If only you knew with certainty of knowledge. (The Quran, 102:3-5) 76 ODonoghue, T. and Rabin, M., Incentives and Self-Control, Econometric Society Monographs, 2006, v.42, pp. 215-245. 77 Masudul Alam Choudhury, The Universal Paradigm and the Islamic World-System, World Scientific Publishing Co., 2007, p.56. 78 Umar Chapra, The Global Financial Crisis: Can Islamic Finance Help Minimize The Severity and Frequency of Such as Crisis in The Future?, presented at Forum on the Global Financial Crisis at the Islamic Development Bank, October 25, 2008. 79 O children of Adam! Dress cleanly and beautifully for every act of worship; and (without making unlawful the things God has made lawful to you) eat and drink, but do not be wasteful (by over-eating or consuming in unnecessary ways): indeed, He does not love the wasteful. (The Quran, 7:31). 80 Umar Chapra, The Global Financial Crisis: Can Islamic Finance Help Minimize The Severity and Frequency of Such as Crisis in The Future?, p.21. 23

Seven, an Islam aims to prevent speculation through superficial lending because it requires the creation of debt through the sale or lease of real assets through its sales- and lease-based modes of financing (murabahah, ijarah, salam, istisna and sukuk).81 In other words, the Islamic finance system allows the creation of lending only if it supports the real economy through a genuine transaction. The system requires creditors to share the risk without transferring it to someone else. Thus, the system helps eliminate speculative and derivative transactions and also prevent(s) the debt from rising above the size of the real economy.82

CONCLUSION Economics as a field suffered a major blow with the 2008 financial crisis due to the failure of its elegant models which rely on some inaccurate assumptions about human nature. If the profession is going to reclaim its reputation, it has to revise these assumptions and accept the fact that a capitalist free market economy has serious flaws and frictions even though it has many virtues in general. As Krugman says, economists have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds and they have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic theory of everything is a long way off. In practical terms, this will translate into more cautious policy advice and a reduced willingness to dismantle economic safeguards in the faith that markets will solve all problems.83 From an Islamic point of views, capitalism is fundamentally flawed in its assumptions of human nature. The system mainly relies on three elements of human nature: ego (self), animal spirit (interest), and mind (rationality). The success of capitalism comes from so-called rational decisions made by capitalist entrepreneurs who try to maximize their profits and consumers who try to maximize their pleasures (utilities) in the market system. However, as seen in over 100 crises throughout the history of capitalism, people are not perfectly rational as assumed by classical economics. In fact, they are predictably irrational. From an Islamic perspective, this is due to the influence of the animal spirit and the ego. While capitalism boosts ego and exploits the animal soul to increase supply and demand in the market, Islam puts certain moral and legal restraints on ego and the desires of animal souls in order to avoid speculation and exploitation in the market. Furthermore, Islam recognizes other key elements of human nature such as spiritual heart and conscience and promotes a harmonious way of life in order to meet their needs and desires. The 2008 financial crisis was mainly driven by the irrational and irresponsible behaviors of politicians, creditors, and consumers. Islam provides a comprehensive understanding of human nature to predict and prevent such irrational behaviors. 84 It sets moral and legal restraints to control them. It prevents consumers from lavish and un-stainable consumption. It restrains capitalists from accumulating wealth without contributing to production. It requires creditors to share risk with investors and consumers. It allows government to intervene in market economy and regulate market players to prevent speculation.
81 82

Ibid., p.15. Ibid., p.16. 83 Paul Krugman, How Did Economists Get It So Wrong?, The New York Times, September 2, 2009. 84 In conventional economics, human behavior is characterized as being rational or with bounded rationality. Thus, social, moral, cultural factors are treated exogenous elements. The predictions and scope of economics in its mainstream outlook, therefore, are almost always incorrect, evasive, unjust and inequitable. This happens because the primal foundations of morals, ethics and value are excluded from the economic calculus. (Masudul Alam Choudhury, The Universal Paradigm and the Islamic World-System, pp.2-3) 24

We will see many more crises if the flawed assumptions of capitalism are not revised based on a comprehensive understanding of human nature. Since the main problem of capitalism lies in its (mis)understanding of human nature, we should start reading ourselves first. Then, we can read the universe. From an Islamic perspective, we can read ourselves only in the name of God, meaning with His infinite light and guidance. Once we understand our nature, we will understand that we are not self-sufficient. We do not have any real power to meet our needs. We rely on the infinite power and knowledge of God at every moment. We will also understand that as everything in the universe is created for certain purposes, we are also created for certain purposes. The main purpose is not to boost the self, turning him into an inner god or serve the elephant, becoming its slave. Rather, the purpose is to disclose our almost infinite potential by relying on the Divine power and mercy through understanding our true nature. Once we understand our innate weaknesses, we would not make the claim of being the master over other beings. We will know that we are trustees over what we posses. We will be humble and live in harmony with everything. Once we make some radical changes in our assumptions about human nature, this will have a cyclical impact in all areas of scientific studies. It will bring a paradigm shift in our understanding of reality, human nature, and the universe. It will provide a necessary framework to solve major crises that are financial, environmental, moral, and happiness related. Thus, it will help us come up with a humane market, a humane government, and a human-friendly technology. In short, most of the prophecies about the fate of capitalism rely on the thesis that economic growth will not be sustained in the long term. The system will eventually collapse once it reaches its limit. My argument is just the opposite. I think that the collapse of the system might come from its success, not its failure in production. In other words, the ultimate success of capitalism in production and consumption will be its end if it is not modified. In my view, the critics of capitalism should pray for its success, not failure, because its ultimate success might be its end. In other words, the success of capitalism in production and consumption will reveal its failure to bring happiness and will cause overwhelming disappointment among people. The system might eventually collapse if it is not revised based on a comprehensive understanding of human nature.

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