Pitfalls in Economic Thinking

Abstract

In order that an organized body of knowledge might be classified as science, its hypothetical laws must be based on facts. Unlike any other social science, fallacies are the root of the technique of thinking in economics. By the lapse of time, theses fallacies have been accepted as if they represent a part of the natural life which people have to live with. Viewing inflation as natural phenomenon: Present economic systems are designed to produce inflation in order to concentrate wealth in few hands. Economists recognize the harmful impact of inflation on societies. Inflation arises, mainly, because prices include additional charges that do not represent an element of the real cost of factors of production. Viewing money as a valuable commodity: Money is no longer a real product or a substitute of a product. Credit money represents most of the money in circulation. The role of money is broadened out of its scope of function as a valueless medium of exchange. Money plays an inflationary role, becomes profit generator and its quantity controls economic activities. Money is a social invention introduced to facilitate exchange transactions. Currency backing is inherently ridiculous tradition that limits economic growth. Viewing lending and speculative activities as economic activities: Huge amount of resources are directed toward financial activities searching for private gain on account of public loss. A historical review of financial crises explains the destructive role of financial activities on societies and the failure of monetary remedies to prevent the ghastly impacts on economic growth. Economic activities have its origin in the wants of communities. Its main purpose is the satisfaction of those wants. Production is meant the activities which result in the creation of utilities.Believing that free market does not exist in reality: Human interventions, legalized monopolies, and speculative activities are impediments to market freedom. Market is free by its nature. Free interaction of market forces makes demand and supply fluctuate to determine fair prices of products. Believing that growth of public services is the way for redistribution of income: In capitalism, redistribution policies which are based on welfare systems do not provide financial security to all individuals. In socialism, redistribution policies which are based on state ownership of means of production do not respect the right of private property.Present economic systems failed to realize prosperity. Poverty is rising and living standard of middle class is declining. Taking into consideration the complexity of present economies, different approach has been taken to identify economic topics. The views expressed here are undoubtedly drastically different from the views held by other researchers. This research assumes full responsibility of inflation for the failure of present economic systems to achieve the objective of prosperity. In its first chapter, the research gives different definition to inflation and illustrates its destructive roles. The second chapter explains the inflationary role of money and introduces different monetary theory based on viewing money as just a thing invented to be a medium of exchange. In the third chapter, optimal output growth and fair distribution of wealth are presented as the aim of a sound economic system. The fourth chapter introduces an integrated inflation-free economic system. Finally, the last chapter presents the ideological viewpoints of Islam with regard to economy.