Economic Series (2): Economic Crisis and Crisis in Economics

Economics cannot stand alone. The decision should neither be based solely on econometric analysis nor any economics modelling. As a social science, economics need to understand the social behavior   The strong held believe assumptions in economics, i.e. efficiency of the market and participants rational behavior, are very often not true.

The side effects of current/mainstream economics, i.e. income inequality, climate change, financial crisis, are more than enough to prove that we need a new economic thinking.

Economics as part of social science is different from natural science. Evidence in natural science is objective, while in social science it is not. In social science there thinking participants while at the same time several events influence the thinking. So there is an absence of independent criteria in economics thinking. This hinders social science in producing a fixed law. Reality is contingent upon participants’ decision; while participants try to make decision based on reality (feedback reflexivity as called by George Soros).

Financial crisis has happened very often due to bubble. Thus it followed by regulatory response.  This will happen continuously without an end due to lack of bold move. The foundation of our economics and financial which is based on interest (unreal economic activity) is inherently unstable.

In addition, It becomes a never ending debate whether government or the market is the source of the problem. I think both. World is complex and change very fast. That is why I think we need a firm guidance-an objective one, which is Allah’s guidance, Qur’an.

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