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October 2019, No. 92


Science & Technology

End of Unscientific Economic Decisions


The problem with our policymakers is that they have no theory at all so that they could test the policy arising from that theory.


Mousa Ghaninejad, economist says the purpose of trial and error in policymaking is to formulate and implement a policy based on a theory you consider to be right in order to discover its faults and correct them. The problem with our policymakers is that they have no theory at all so that they could test the policy arising from that theory. 

What have been the consequences of “policy-making based on trial and error” for our country in recent decades?

In essence, the purpose of trial and error in policymaking is to formulate and implement a policy based on a theory you consider to be right in order to discover its faults and correct them. Therefore, “trial and error” is not wrong per se.

Of course, policymaking cannot be done merely on the basis of trial and error. The problem with our policymakers is that they have no theory at all so that they could test the policy arising from that theory. They have a series of inspirations on the basis of which they make decisions. They would not correct their inspirations and approaches even when they find out that their decisions have not produced good results.

The experience of wrong policymaking has been repeated over the years on the basis of the taste of policymakers who are at the top. One example is the Usury Free Banking Act, which was approved in 1983 for the purpose of establishing usury free banking. The authorities said that in the previous law there was usury which was incompatible with Islam and needed to be corrected. Aside from the bugs of this claim, it was anticipated that the law would be put into practice for five years on trial basis and be corrected after five years. Some 36 years have passed since 1983 but no reform has taken place. The law was supposed to be redefined and corrected after a five-year period.


When we want to make policy, our work is not trial and error, but a shot in the dark. For decades, we have been firing shot in the dark.


Another problem that can be seen in this example is the lack of theory. When they raised the theory of usury free banking there was no coherent theory backup for it. It was just words! They said they wanted to create a kind of banking minus usury. What they meant was to eliminate conventional bank interests in all banking systems of the world, while bank interests in the modern and conventional banking system of the world play the role of a driving engine. Later, in the 1990s, discussions took place about this topic, and I also contributed to the discussions. I said you want to remove the driving engine of a car, please explain how this car would work? But I did not get any response.

They said this is a loan contract, and we will convert it to Islamic contracts such as exchange contracts, participatory contracts, etc. and the problem will be solved. But this was not the answer to my question! My question was how this car will work without a driving engine. They gave no answer because there really was no theory. They simply said that banking was un-Islamic and usury based in the whole world, and had a utopian picture of ​​a banking system they said was Islamic.

Early in the 1979 Revolution, there were lots of passion. They said they would run this law for five years and then we see what happens. Then they began implementation and wanted to carry out the trial and error, but they did not seem to have any errors in their trials because no reform has been made yet! The status of banking in the last 36 years shows what results has this policymaking produced. The same is true in other areas of policymaking in monetary and foreign exchange areas as well as development policies. A series of slogans and ideals are proposed without theoretical support. If these ideals are theoretically supported, if the goal is clear, if the tools are designed and if the ways to achieve them are implemented so that the errors are reviewed and modified after some time, that would be excellent!

But we do not see a single reform in the policymaking. In many other policies, we also see that a work has been launched without a theoretical basis and abandoned after it fails to produce the expected result and nobody would try to do something about it. Similar events have occurred again taking the same wrong course.

See how many times the country has faced foreign exchange turbulences? These currency turbulences over the last few decades are primarily due to a series of wrong monetary policies and, to a lesser extent, failure to revise the exchange rate in light of inflation. Inflation means devaluation of the national currency and the reduction of purchasing power. If we intend to keep the exchange rate stable upon orders (of the government), we will face numerous problems, such as sudden jump in the exchange rate and the ensuing turbulences. After the Revolution, we have experienced these problems several times in the 70’s, 80’s and 90’s, but policymakers have not learned lessons and repeated the same wrong policies. 

Why policymakers do not learn from past errors and regularly try them?

The reason is that policymakers and political power owners who are responsible for decision making at the head of the decision making pyramid imagine now that they have attained the decision making authority they have knowledge of everything perfectly, are absolute sage, and no longer need the science of scientists or economists. The power wielder who wants to make a decision about the foreign exchange should be either an economist or consult economists at least. Which of the two options was applied when the government decided to set a rate of 42,000 rials for one USD? It is not clear! The individual or the group who took this decision claimed absolute knowledge and thought that although they did not study economics, because they hold power, their knowledge was more than that of economists and they could set rates and everyone should obey their orders.

The problem is that these people get illusion of science as soon as they take power and are at the top of the bureaucratic system and assume responsibility. Of course, this does not happen just in our country; politicians in many other countries of the world follow the same line. In fact, power gives them illusions of science and they make decisions on the basis of the same illusion. When they realize that the result of their work is wrong, they blame others and say the experts had misinformed them. Well, you need to specify which expert gave you what report that you made such a decision. None of these is clear. 

What has been the most harmful feature of economic policymaking over the past four decades?

The worst of this policymaking is the disregard for economics. At the beginning I mentioned the example of usury free banking. The gentlemen who were sitting there and writing this law had mostly studied economics in the United States. They claimed that the science that is common in the whole world and is the basis of the standard global banking was wrong! This is a big claim. Then they stressed that what they said was right, namely usury free banking or interest free banking. The first drawback was that the claim by these so-called economists that the current global banking was taking the wrong course related to value judgment which, in my opinion even their value judgement was mistken.

They said that in the current global banking system the interest is the same as usury and since usury is rejected by Islam, the international system was wrong. Scientifically, when you talk about the good or bad aspects rather than the existing reality, you in fact raise a value oriented and normative debate. Another drawback was that the assessment of the fact that bank interest was the same as usury was essentially false. They had to prove this. Later on, I came up with a discussion with these people and asked them to prove that bank interest was the same as usury. They did not and merely discussed the value aspects. They said this was a loan contract and usury was rejected by Islam. You cannot call this argument. Argument must have a scientific basis.

Examples of erroneous and harmful decisions have been numerous in recent decades, but most of these wrong decisions are rooted in contempt and underestimating science, and even humiliation and remission of common sense based on the values ​​they consider to be superior. They also cannot prove that these values ​​are consistent with what is outside the world. They say something, and then, on the basis of that, like the example of usury free banking I mentioned earlier, they write down the law and change the entire banking system of the country. The big drawback is that we classify science into good science and bad science, Western science and Islamic science, and so on. As a result, we’ve got these hardships and we cannot find the right way. Finally, when we want to make policy, our work is not trial and error, but a shot in the dark. For decades, we have been firing shot in the dark. We are doing the same today.

 

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  October 2019
No. 92