Free Market Madness and Human Nature

Abstract:     
The 2008 financial crisis has touched almost every nation around the world resulting in the loss of trillions of dollars in wealth. People began seriously questioning the fundamentals of free market system. While some blame politicians, bureaucrats, and corporate leaders for their mistaken policies, others blame human nature. In Alan Greenspan’s terms, “The cause of our economic despair, however, is human nature’s propensity to sway from fear to euphoria and back.” Greenspan is not the first one blaming human nature for economic crises. John Maynard Keynes made a similar point in his famous recession prescription book, The General Theory of Employment, Interest and Money. Many other economists refer to human nature in their works as well. For Bentham, it is human nature to pursue pleasure and avoid pain. For Adam Smith, it is human nature to act based on “self-interest”. However, no one elaborates on human nature which stays like a “black box” from which key assumptions in free market system are derived. This paper is an attempt to unlock the black box of human nature to better understand the crises of capitalism, including the most recent one. Even though the author agrees with Greenspan that the current financial crisis, and perhaps all economic crises, is driven by human nature, he disagrees with him that such crisis is unpredictable and unpreventable. The paper offers a new theory of human nature from an Islamic perspective to predict and prevent irrational and irresponsible behaviors of populist politicians, greedy capitalists, and conspicuous consumers.

Number of Pages in PDF File: 25

Keywords: Financial crisis, human nature, happiness, islamic finance, free market, free market madness, capitalism

JEL Classification: A12, A13, B40, B41, D01, D03, D11, P10, P17

working papers series