Asad Zaman

Econometric Applications of High-Breakdown Robust Regression Techniques

A literature search shows that robust regression techniques are rarely used in applied econometrics. We present a technique based on Rousseeuw and Van Zomeren [Journal of the American Statistical Association, 85 (1990) 633–639] that removes many of the difficulties in applying such techniques to economic data. We demonstrate the value of these techniques by re-analyzing three OLS-based regressions from the literature.

Causal Relations via Econometrics

Applied econometric work takes a superficial approach to causality. Understanding economic affairs, making good policy decisions, and progress in the economic discipline depend on our ability to infer causal relations from data. We review the dominant approaches to causality in econometrics, and suggest why they fail to give good results. We feel the problem cannot be solved by traditional tools, and requires some out-of-the-box thinking. Potentially promising approaches to solutions are discussed.

Logical Positivism and Islamic Economics

We provide a detailed discussion of current methodology of economics and its emergence from secular roots in Europe. The foundational principles of this methodology, which is based on logical positivism, are in conflict with Islam. We then sketch some alternative methodologies which would be more suitable for Islamic economics. We first describe how logical positivism emerged as the dominant philosophy of science, and how it was adopted into the foundations of economics. We then show that the current economic methodology is based on logical positivism. This philosophy is anti-Islamic, and therefore cannot be used to construct Islamic Economics. There are two main points of opposition. Logical Positivism rejects the unseen, while Islam requires faith in the unseen. Logical Positivism rejects morality as unscientific, while morality is a central part of Islamic teachings. This means that a methodology for Islamic economics must be radically different from that currently in use in conventional economic theory. Some essential elements of an alternative methodology are sketched.

Islam versus Economics

The paper shows that fundamental Islamic principles regarding organisation of economic affairs are directly and strongly in conflict with teachings of conventional economic theories.

The Normative Foundations of Scarcity

The elevation of scarcity to the fundamental economic problem rests on some unstated normative assumptions. These include a pol itical commitment to private property, a methodological commitment to not inquire about taste formation, and the idea that human welfare is roughly equivalent to prefere nce satisfaction.

Building Genuine Islamic Financial Institutions

Since the spirit of Islam is in stark and violent conflict with the spirit of Capitalism, the form taken by institutions designed to express this spirit must also be different. Capitalist financial institutions are designed to support the process of accumulation of wealth, which is at the heart of capitalist societies. Central to Islam is the spirit of service, and spending on others, which is expressed by diverse, service-oriented institutions, radically different from those dominant in capitalist societies.

Death of a Metaphor: The Invisible Hand

Models are representations of reality. They simplify and ignore many complexities in order to focus on certain aspects. With constant and repeated use, theorists sometimes confuse the model with reality. This leads to many types of errors. In this article, we argue that the metaphor of the invisible hand has become deeply entrenched in the ways of thinking about and framing of economic problems. This has led to overuse and abuse of the metaphor. Why this happened, what harm has resulted from it, and how it can be remedied is the subject of this paper.

Tests for Normality Based on Robust Regression Residuals

We consider the effects of using residuals from robust regression in place of OLS residuals in test statistics for the normality of the errors. We find that this can lead to substantially improved ability to detect lack of normality in suitable situations. Using simulations, we find that situations where a small subpopulation exhibits characteristics different from the main population are those ideally suited to the use of robust normality tests. We give several examples from the literature to show that these type of situations arise frequently in real data sets.

Failures of the “Invisible Hand”

Despite many failures of the invisible hand both empirically and theoretically, it continues to be vigorously asserted and widely believed. We document the failures and explain why it continues to be asserted despite these failures.

Deification of Science and Its Disastrous Consequences

Our goal is to show that production of knowledge requires different approaches in different areas. In particular, radically different methodologies are suitable for mathematics, science and humanities. Mathematics requires an axiomatic and deductive approach, while science requires an inductive and empirical approach. Historical events in Europe led to a conflict between science and religion, and a consequent attempt to use science to replace religion. The attempt to prove that science leads to certainty led to the mistaken understanding that scientific methodology is mathematical. The assumption that science is the only valid body of knowledge led to the mistaken attempt to apply this wrong understanding of scientific methodology to the social sciences. These two mistakes have crippled the development of our understanding of human beings and societies. The failure to understand the basic realities of human experience has led to many disasters, and needs to be rectified by correcting this double mistake.