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is based on fractional reserve banking and debt, whereby banks create money though loans and investors and consumers borrow to finance investment and consumption. The assumption of excessive debt, or leveraging, exposes the financial system to bad decisions and debt that cannot be repaid, setting off a chain reaction of defaults among financial institutions and causing panic and requiring government bailouts that become a burden for average taxpayers. Moreover, serious financial crises, most notably the Great Depression and the financial crisis of 2007–2008, lead to panics, loss of business and consumer confidence, deleveraging, severe and prolonged recessions or depressions, long-lasting periods of high unemployment, and, ultimately and most ominously, unbearable pressure on families and on the fabric of society and social cohesion.

      Neglect of Human Welfare Dimension of Economic Development

      A third criticism of mixed market economies is the focus on gross domestic product (GDP) and not on the happiness, well-being, and welfare of individuals and society at large. In the West, under the mixed market system, the focus of economic policy is largely GDP and GDP per capita, not on the condition of all humans. Human beings are not the end result of all economic activity but are taken in part as inputs to economic production, and the economic goal has become how much goods and services are produced. Thus, other goals, especially human well-being, freedom to pursue individual goals, and social cohesion, have fallen by the wayside. These shortcomings became increasingly recognized in the West during the late 1970s and 1980s through the works of Mahbub ul-Haq and Amartya Sen.

      Mahbub ul-Haq argued that all development and growth models following World War II considered humans, whether as labor or human capital, to be an input into the production process and therefore a means for development. What was missing, he asserted, was the consideration of the human as the end of the development process. He developed the idea of “basic needs,” which laid the foundation for his later work on “human development,” culminating in the publication of the Human Development Report in 1990. As he says in his book, Reflections on Human Development, “After many decades of development, we are rediscovering the obvious – that people are both the means and the end of economic development.”5 In his foreword to ul-Haq's book, Paul Streeten defines human development as “widening the range of people's choices. Human development is a concern not only for poor countries and poor people, but everywhere. In the high-income countries, indicators of shortfalls in human development should be looked for in homelessness, drug addiction, crime, unemployment, urban squalor, environmental degradation, personal insecurity and social disintegration.” Aside from the recommendation that economic development should focus on humans as ends as well as means, Mahbub ul-Haq concentrated on enhancing human productivity as a means of development, arguing that the labor force is productive when it is well nourished, skilled, and well educated.

      The Human Development Index (HDI) was an attempt to devise a technical means to provide an indication of a society's level of human development and to measure its progress through time. In its initial formulation, the HDI included three variables:

      1. Per capita GDP, calculated at the real purchasing power exchange rate

      2. Literacy rates

      3. Life expectancy at birth

      This was the first major attempt to focus attention away from the growth of GDP as the measure of the development and progress of countries. By introducing literacy and life expectancy, the HDI broadened the information base of the meaning of development. Any increase in HDI could be interpreted as an improvement in the society since progress on education and health benefits the society as a whole. To a degree, the inclusion of health and education in the original HDI corrected the distributional ambiguity contained in per capita GDP as the only indicator of economic progress since it can conceal large income inequalities. The HDI also made it possible to produce a ranking of countries that would give some indication of drawbacks to affluence by showing “the troubles of overdevelopment – or, better, maldevelopment – as well as those of underdevelopment. Diseases of affluence can kill, just as the diseases of poverty can. Income statistics, by contrast, do not reveal the destructive aspects of wealth,” as reported by the 1990 Human Development Report (HDR). It is thus possible for a country to rank low in terms of per capita GDP but high in terms of HDI.6

      Amartya Sen's concept of “development as freedom” was an effort to further modify, expand, and enhance the meaning of development. Sen expanded the theoretical and empirical dimension of human development from its definition as “both the process of widening people's choices and the level of their achieved well-being” to its culmination as “freedom.” The 1990 HDR had identified well-being as including, among others things: access to income; health, education, and long life; political freedom; guaranteed human rights; concern for the environment; and concern for participation. Under the influence of Sen and his colleagues, this view was revised to suggest that the goal of development is “to secure the freedom, well-being and dignity of all.”7

      Sen notes that in an age of “unprecedented opulence,” there is also “remarkable deprivation, destitution and oppression.” In both rich and poor countries, there are, in one form or another, problems of “persistence of poverty and unfulfilled elementary needs, occurrence of famines and widespread hunger, violation of elementary political freedoms as well as of basic liberties, extensive neglect of the interests and agency of women, and worsening threats to our environment and to the sustainability of our economic and social lives. Overcoming these problems is a central part of the exercise of development.”8

      Sen argues that it is the individual agency (the capacity for human beings to make choices and to impose those choices on the world) and social arrangements that, deeply complementing each other, determine the extent to which problems and deprivations can be addressed successfully. Freedoms of various kinds are essential to the exercise of human agency. Social arrangements, in turn, determine the extent of human freedom and agency; individual freedom has to become a social commitment so that human agency can become effective in solving problems. Sen conceives of the expansion of freedom “both as the primary end and as the principal means of development. Development consists of the removal of various types of ‘unfreedoms’ that leave people with little choice and little opportunity of exercising their reasoned agency. The removal of substantial unfreedoms, it is argued here, is constitutive of development.” Freedom is multidimensional and “instrumental effectiveness by freedoms of particular kinds to promote freedoms of other kinds” serves to promote freedom as the “preeminent objective of development.” These instrumental freedoms include political freedoms, economic facilities, social opportunities, transparency guarantees, and protective security.9

      Although the human dimension became recognized, little has changed in economic management and policy in the West. In these mixed market economies, all eyes are glued to quarterly and annual GDP growth with a smattering and infrequent reference to poverty and income inequality here and there. While there are many valid criticisms of modern-day capitalist mixed economies, they still generally are perceived to be the most efficient in delivering economic output and growth, and international institutions such as the World Bank and the International Monetary Fund continue to recommend most of the capitalist prescriptions. But economic efficiency does not necessarily embrace economic justice, human well-being, and social harmony.

      Irrational Assumption of Rational Self-Interest

      In recent years, more and more economists have raised serious questions regarding the basic postulates of the classical-neoclassical economic paradigm. Aside from those who have focused their criticism on the separation of economics from ethics, such as Amartya Sen, others have focused on the postulate of rational self-interest of the paradigm without rejecting its other features. One example is the position of two prominent economists, George Akerlof and Robert Shiller. In their book Animal Spirits, they revive the concept of “animal spirits” proposed by Keynes, saying that Keynes “appreciated that most economic activity results from rational economic motivation – but also that much economic activity is governed by animal spirits.” While accepting that

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