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Asad Zaman

Asad Zaman

Physician executive. All opinions are my personal. It is okay for me to be confused as I’m learning every day. Judge me and be confused as well.

Articles by Asad Zaman

Critique of Rajan on debt

February 2, 2021

From Asad Zaman 
“my views are based on insights acquired from MMT, but  .  . . . . . . . . . . . ”         
In this post, I will provide a critique of Raguram Rajan’s article “How Much Debt is Too Much?”. (Alternative link to Rajan’s article)
The article opens with a description of the governments “opening their coffers, to support small households and firms” in the COVID era. Required spending has been on the order of 15-20% of the GDP, and the article examines the extent to which government can finance this extra expense by borrowing at low interest rates from the private sector.
The language reminded me Robin Hood and his team swooping down on government convoys laden with coffers of gold. In face of this generosity by the government, it seems churlish to examine their coffers, to

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Marilyn & the Goats: A new solution to an old problem

January 21, 2021

From Asad Zaman
Introduction: In a previous lecture, we gave a New Definition of Probability. In this lecture, we will show how this definition enables us to resolve the massive amount of controversy which surrounds an apparently simple probability puzzle, known as the Monty-Hall problem. The book The Power of Logical Thinking, quotes cognitive psychologist Massimo Piattelli Palmarini: “No other statistical puzzle comes so close to fooling all the people all the time [and] even Nobel physicists systematically give the wrong answer, and that they insist on it, and they are ready to berate in print those who propose the right answer.” Before proceeding to discuss this problem, we review the key features of our new definition:
Probability is a feature of external reality, not an aspect of

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A new definition of “probability”

January 13, 2021

From Asad Zaman
An article by Alan Hajek in Stanford Encyclopedia of Philosophy lists six major categories of definitions. Many more are possible if causality is also taken into account. These definitions conflict with each other, and face serious problems as interpretations of real-world probabilities. The basic definition of probability we will offer in this lecture falls outside all of these listed categories. Before going on to present it, we briefly explain why there is such massive confusion about how to define probability.  read more

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Why do we need pluralism in times of disruption? A practical guide

January 7, 2021

From Asad Zaman
Today we are going through a period of disruption due to the COVID-19 pandemic that impacts us individually and collectively in an unprecedented manner. Because we see how interconnected we are, the sense of unity, solidarity in time of crisis is necessary. So why bother with pluralism in the first place?
Introductory remarks about pluralism and the new normal
We are currently in an unprecedented moment in human history. Although humanity went through several pandemics and disruptions, this is the first time that all the globe is equally affected by the virus, and everyone, everywhere, has to deal with the lock-down and its consequences. Our normal is gone, and we do not know what is ahead of us. The world as we knew it is not there, and there is little left of the

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Debt, levered losses, & unemployment

December 29, 2020

From Asad Zaman
A previous post on “Causes of the Global Financial Crisis” provided a detailed summary of the first three chapters of “House of Debt” by Mian and Sufi. This post provides a brief summary of Chapters 4 and 5, in which they present a theoretical framework which explains why leveraged debt leads to high unemployment following a shock to asset prices. The main insight is that the problem is caused by interest-based debt contracts which put most of the risks of default on the weaker party (borrowers), and very little on the stronger party (lenders). Equitable risk sharing between lenders and borrowers would provide a solution.
Background: In the Keynesian Revolution and the Monetarist Counter-Revolution, I have explained how high and persistent unemployment after the Great

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Differentiating social, market, and government debts

December 25, 2020

From Asad Zaman
In a previous post on “ABC’s of MMT”, I explained the basics of MMT as a preliminary to a critique of Raghuram Rajan’s article on “How Much Debt is Too Much?”. A significant part of the discussion on this post consisted of debates over words and their meanings. My use of words like assets, savings, wealth, liability, and debt was contested, and alternative usages were offered. It seems necessary to pause for a discussion of these terminological confusions, prior to going on Rajan’s article. This is because part of the critique is about the terminology used by Rajan. Standard terminology is based on false analogy between the government and the household. In a previous post on “The Power of False Names”, I have explained how the use of misleading terminology can lead to

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ABC’s of Modern Monetary Theory (MMT)

December 13, 2020

From Asad Zaman
I was overwhelmed by the level of ignorance displayed by distinguished economist Raghuram Rajan in his article entitled “How Much Debt Is Too Much?” published recently in Project Syndicate on Nov 30, 2020. I had meant to write a critique of the article, but to do so requires starting from the very beginning. In this post, I go over some basic MMT concepts, in order to prepare the ground for this critique. There are now many good videos explaining these basics. I will go over six questions discussed in the first ten minutes of “Modern Money & Public Purpose 1: The Historical Evolution of Money and Debt” by Professor L Randall Wray. Learning the answers to these questions provides foundations for understanding MMT which are evidently missing in Rajan’s paper. Professor

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Economics as moral philosophy

December 6, 2020

From Asad Zaman
Among the many dimensions I have listed in “New Directions in Macroeconomics”, the most important is the moral dimension. If we take Adam Smith as the founder, economics was born as a branch of moral philosophy. However, modern economists claim that the subject is purely positive and scientific, and makes no value judgments. Before we can discuss moral dimensions of economic theories, we must counter this claim, and establish that, contrary to claims made by economists, the subject is deeply and inherently normative. The level of cognitive dissonance required to maintain that economics is objective and value free is much greater than that required to maintain that the earth is flat. How apparently rational and sane people can hold such a stance is in itself a puzzle. I

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Complexity Economics

December 4, 2020

From Asad Zaman
Classical Physics, the model for modern economics, was based on the ideas of stability and permanence of astronomical orbits; see Mirowski (1992). Deeper examination of astrophysics led to the replacement of this view by big bang which gave birth to the universe, and increasing entropy, which will lead to its heat death. “Equilibrium” just appears as a temporary and local phenomenon in an evolving and chaotic universe.
Complexity economics takes non-equilibrium seriously. Constantly evolving systems may never be in equilibrium and may even lack a tendency towards equilibrium. The mode of analysis required for such systems cannot be based on the kind of mathematic currently dominant in the economics profession. Complex systems theory was pioneered in the 1980s and 1990s

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Ecological Economics

November 28, 2020

From Asad Zaman
Eurocentric history portrays the West as advanced, rational, scientific, and democratic, while the East is superstitious, unscientific, autocratic, and backwards. This poisonous philosophy enabled the incredibly brutal and ruthless violence required for the conquest of the globe, and continues to sustain extremely exploitative economic systems. A partial antidote is World Systems theory which portrays all human beings, nations, and cultures, as joint participants in weaving the rich fabric of human history. Ecological economics goes further to take the entire humanity as one element of the biosphere and geosphere of our planet. All of the biological species have their “economics” where they consume and produce, directly or indirectly affecting other species. All of

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Developments in money and finance absent from conventional macro textbooks.

November 2, 2020

From Asad Zaman
Somebody aptly quipped that ‘Trying to understand the economy without understanding money and finance is like trying to understand how birds fly, without taking the wings into account”.
The Hegelian anti-thesis of the orthodox economic position that money is neutral, is the idea that “money is everything”. Economics is just the analysis of monetary flows, both within a society, and globally. Karl Marx describes the change in perspective via the formulae C-M-C’ versus M-C-M’. In the first paradigm, commodities C are sold to get money M, in order to buy another set of commodities C’. This picture of a barter economy, in which money just facilitates exchange, is at the heart of modern economics; this is why money does not matter. However, in a capitalist economy, M(oney)

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Political Economy

September 30, 2020

From Asad Zaman
This is a sequence of posts on “New Directions in Macroeconomics“, which discusses the numerous directions of research which must be incorporated to create a viable Macroeconomics for the 21st Century. We have previously discussed “Post-Keynesian Economics“, and “Modern Monetary Theory“. This post discusses the necessity of re-incorporating politics into economics.
Once we recognize the importance of history and institutions, it becomes clear that economic problems cannot be separated from politics and society. The interplay of class interests, and their relative power, is of essential importance in understanding political and economic structures of society. Current commitment to methodological individualism has blinded economists to these aspects, and left them unable

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Modern Monetary Theory

September 22, 2020

From Asad Zaman
This continues from the previous post on Post-Keynesian Response. A large number of contributions from different areas need to be integrated to build an economics for the 21st Century. For an acknowledgement of the failure of 20th Century Macro from one of its architects, see Romer’s Trouble With Macro. This post explains Modern Monetary Theory briefly.
Since the time of Keynes, major changes have taken place in the global financial system. Against wishes of Keynes, Bretton-Woods created a dollar centered system based on notional exchangeability of dollars for gold. The Nixon Shock in 1971 removed the gold backing from dollars, leading to the modern world of floating exchange rates. Dramatic changes in the monetary exchange systems and financial institution play no role

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Post-Keynesian Response

September 3, 2020

From Asad Zaman
This continues from previous post on New Directions in Macroeconomics. Among the heterodox responses to the crisis in economic theory created by the Global Financial Crisis 2007, we will briefly discuss the following:  Post-Keynesian Economics, Modern Monetary Theory, Political Economy, Evolution of Global Finance, Ecological Economics, Complexity Economics, Islamic Economics. This post is about Post-Keynesian Economics.
The response of mainstream macroeconomists to this crisis has been disappointing; see for example Antara Haldar (2018) “Economics: The Discipline that refuses to change”. The failure of classical economics in the Great Depression of 1929 led Keynes to the create the field of macroeconomics, which was revolutionary many different ways. Unfortunately,

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Four narratives about central banks

June 26, 2020

From Asad Zaman
The previous post (Three Mega-Events Which Shape Our Minds) explains the importance of history in shaping the world we live in. Historical events (facts) by themselves are not meaningful until they are linked together into a coherent narrative. The mortar which connects the facts must be supplied by our minds, and can never be asserted with certainty. The fact that we can never be certain about the narratives which connect and explain history has led to two polar mistakes. The positivist mistake is to renounce narratives, and focus solely on the facts. This makes it impossible to make sense of history, which deprives us of a rich storehouse of human experience. In effect, it means that we must start afresh every day, since the past makes no sense. The other extreme is

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Three mega-events which shape our minds

June 22, 2020

From Asad Zaman
What is the nature of the world in which I live? As I look around me, I see walls, windows, doors, and furniture. But these are insignificant parts of the world as constructed by my mind. I conceptualize the world through the teachings of history, according to which human history started in the remote past, with hunter-gatherers. I have a smattering of knowledge of the ancient civilizations of Sumeria and Babylon, and much more of the Roman Empire. The rise of Christianity, Islam, the Ottoman Empire, the Industrial Revolution in England.  The NARRATIVE, or the stories woven around these events, and my own place – or that of my ancestors – within these events, shapes my identity, my allegiances, and also my hopes, visions and projects for the future. These narratives

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Bagehot’s engaging naiveté

June 16, 2020

From Asad Zaman
Chapter 2 of Goodhart’s “Evolution of Central Banks” cites in detail several arguments made by Bagehot (pronounce Badge-it) in favor of a free banking system without a Central Bank. After listing them, he notes that Bagehot is “engagingly naïve”, as a gentle critique. It is astonishing that a hard-nosed practical financial analyst like Bagehot would indulge in such visionary daydreams about a “free market” system. This testifies to the power of ideology to blind one to the faults of idolized system. Here are some of the “naïve” arguments advanced by Bagehot in favor of free banking:
In a competitive free banking system, every bank would maintain adequate reserves, to create credibility.
Also, in case of panics, they would lend to distressed banks, in order to protect

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Central Banks: Monopoly or Public Service?

May 30, 2020

From Asad Zaman
The Reagan-Thatcher revolution in the late 1970’s consisted of a move towards free markets, and away from government regulation and control. Of central importance in this move was the deregulation of financial institutions. We would like to understand WHY this change took place, and WHAT were the effects of this change on the working of the USA/UK economies.
Summary of Basic Facts: Financial de-regulation, guided by an ideological belief that free financial markets would work better than regulated ones, was at the heart of the Reagan-Thatcher revolution. The evils of free financial sector had clearly been recognized in the Great Depression, The Emergency Banking Act of 1933 and other regulatory measures wrapped a large number of chains around the financial monster,

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How economic models became substitutes for reality

May 21, 2020

From Asad Zaman
The problem at the heart of modern economics is buried in its logical positivist foundations created in the early twentieth century by Lionel Robbins. Substantive debates and critiques of the content actually strengthen the illusion of validity of these methods, and hence are counterproductive. As Solow said about Sargent and Lucas, you do not debate cavalry tactics at Austerlitz with a madman who thinks he is Napoleon Bonaparte, feeding his lunacy.  Modern macroeconomic models are based assumptions representing flights of fancy so far beyond the pale of reason that Romer calls them “post-real”.   But the problem does not lie in the assumptions – it lies deeper, in the methodology that allows us to nonchalantly make and discuss crazy assumptions. The license for this

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The misleading case for free markets

May 11, 2020

From Asad Zaman
This sequence of posts goes through Charles Goodhart’s book on Evolution of Central Banking. Previous post is: RG5 Evolution of Economic Systems
Chapter 2 opens with a discussion of the views of Walter Bagehot (pronounce as badge-it), author of Lombard Street, which has received a lot of recent acclaim as masterpiece on central banking. After the Global Financial Crisis, Martin Wolf asked “Doesn’t what has happened in the past few years simply suggest that [academic] economists did not understand what was going on?”. Larry Summers responded by naming Lombard Street (1873). There are many articles which examine how a 150 year old book provides insights into the financial crisis which modern economists do not understand!. See, for example, Brad De-Long’s This Time is Not

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Evolution of economic systems

May 7, 2020

From Asad Zaman
Economic systems evolve, sometimes under external dynamic and sometimes under internal dynamics. As they evolve, economic theories co-evolve, however their can be (often are) lags in understanding – so theories relevant to one system are applied to another, with disastrous results.
Human beings started out with tribal societies, and spent the longest period of history in this form. They societes were egalitarian and communal. They were not market oriented. Production and  distribution was done by consensus of the community. Communities were self-sufficient, producing or acquiring basic needs for all members, without any markets or trade. For more details, see “Hunter-Gatherer Societies”.  An essential point to understand is that the economic system shaped the nature of

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Economic theories cannot be understood outside their historical context

May 4, 2020

From Asad Zaman
It is an Obvious Truth that economic theories analyze specific historical economic systems.
In nomadic societies, there is no production. Economics would be about finding plants, game, and moving according to seasons.
In agricultural societies, private property becomes important. Those who plant need to have rights to harvest their plantings.
Feudal Societies are mostly self-sufficient in commodities and operate without money. These are barter societies. Money is not a goal, but only a means to get more goods. Karl Marx explained this via the formula: C – M – C’  which means that Commodities are sold for money, which is used to get different commodities.
Market societies: people sell labor for wages to produce commodities. Money is used for purchase. Money is main

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Arguments against Central Banks

April 28, 2020

From Asad Zaman
RG2 (Reading Guide 2) – Continues from previous posts on Reading Course: Central Banking and Readers Guide: Goodhart on Central Banks. Writeup is given following the ten minute video:
[embedded content]
Goodhart starts by discussing discontent with Central Banking System. He wrote this book well before the GFC 2007 -8, which has created much greater discontent. There are two different lines of attack on Central Banking:
Free Banking: Private Creation and Provision of Money. Today, this idea would find shape in large scale private creation of money via bitcoins, FB Libra, community money, and many other innovative ideas for creation of money without governments being involved.
Regulated Central Banks: Banks should follow specified rules, like Friedman’s rule of 6%

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Reading course: Central Banking

April 22, 2020

From Asad Zaman
I am in process of creating an online course on the history of Central Banking. The era of online courses has been forced upon us by the Corona Virus, though I have been meaning to do this for a long time. The WEA Pedagogy Blog seems like a great place to do a beta-test. I would like to start by inviting the audience to read through Charles Goodhart’s book on the Evolution of Central Banking. We would plan to read one chapter a week and discuss it on posts and/or comments on posts on this blog. Those who formally register on the Google Form: History of Central Banking will be put on an email discussion group for the book, and also get a link to download a copy of the book itself. Some motivation for why it is worth reading this book is given below:
Conventional Macro

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Mäki Rules on Rodrik’s Rules

April 8, 2020

From Asad Zaman
Mäki, Uskali. “Rights and wrongs of economic modelling: refining Rodrik.” Journal of Economic Methodology 25.3 (2018): 218-236.
Introduction: I must confess to having admired Dani Rodrik. His research was iconoclastic, fearlessly going after many sacred cows of economics. So, I was saddened and disappointed by his defense of Economics: Rodrik, Dani (2015) Economics Rules. Why Economics Works, When It Fails, and How to Tell the Difference. Oxford UP. Rodrik uses “rules” in a dual sense; a set of rules to discriminate between good and bad economics, as well as an assertion of the superiority of economics. This post is a fairly longish 2100 word summary of the first half of  Mäki’s trenchant critique the book, linked above. If I find the time and energy, I might do the

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GDP comparisons across time

March 10, 2020

From Asad Zaman
This continues a sequence of posts aiming to show how apparently objective statistics conceal large numbers of arbitrary value judgements.  (1) Lies, Damned Lies, and Statistics, (2) Subjectivity Concealed in Index Numbers, (3) The Values of a Market Society, (4) Cross-Country Comparisons of Wealth, (5) Purchasing Power Parity, (6) Downfall of Rhetoric in 20th Century, (7) Facts & Values: Distinction or Dichotomy?. This is the 8th post, which considers comparisons of GDP across time within a single country.
In comparisons across countries, we face the difficulty that the concept of “wealth” has varied across societies, and changed with time. The “average basket” of goods varies for each country, because different societies have different preferences and values. We

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Facts & Values: Distinction or Dichotomy?

March 3, 2020

From Asad Zaman
This continues from the previous post on the Downfall of Rhetoric in 20th Century
Even though our goal is to explain how apparently objective looking statistics conceal arbitrary and subjective judgments, the path we take requires a detour through “epistemology”, or the theory of knowledge. Instead of the deep discussion provided by Putnam (2002, Collapse of the Fact/Value Dichotomy), we will take a shortcut, and look at how these philosophical debates and controversies about have shaped the way that social sciences in general, and statistics in particular, have conceived of the relationship between the numbers we analyzed and the real world that generates these numbers. The wide gap between the philosophers and other intellectuals can be seen clearly in their

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Downfall of rhetoric in 20th century

February 29, 2020

From Asad Zaman
One of most effective and powerful among modern forms of rhetoric is the use of statistics to conceal the ancient methods for persuasion. How this is done is the main topic of our essay.
In a sequence of posts ( Lies, Damned Lies, and Statistics, Subjectivity Concealed in Index Numbers, The Values of a Market Society, Cross-Country Comparisons of Wealth, and Purchasing Power Parity), I have tried to explain how the statistics we use conceal arbitrary value judgments. This is the modern form of rhetoric, which is deadly, because the values are built into numbers, hidden in the process by which the numbers are manufactured, and not open to discussion and dispute. The initial post gives a brief hint as to how this state of affairs emerged. This post elaborates some more on

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Purchasing Power Parity

February 26, 2020

From Asad Zaman
In a sequence of posts starting with  Lies, Damned Lies, and Statistics,  I have argued that the attempt to reduce multiple indicators to one number always introduces subjective elements relating to choice of factors, and relative weights to be assigned. By using technical jargon to justify choice of weights, the value judgments involved in this choice are concealed under a cloak of objectivity. This creates a modern form of rhetoric, where the arguments are made using numbers, and the values that went into the manufacture of these numbers remain hidden, and therefore, are not discussed. This concealment of values resulted from the creation of an artificial dichotomy between facts and values which became widely accepted. Values are considered unscientific, personal

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