Article1

Abstract

A comparative examination of mainstream economic doctrines and their recent developments is undertaken with a view to find out how ethics has been treated in these. The principal focus here is to identify the new paradigm that can treat ethics endogenously in preference formation, the market and the economic order. The quest for this paradigm leads us to an examination of Islamic economics. Islamic economics is presented in terms of its epistemological roots. Thereby, a general systems view of interactions, integration and creative evolution among economic and social possibilities is shown to lead to the paradigm of Islamic political economy. Some Islamic financial and economic instruments are examined to bring out the pervasive causality of the principle of universal complementarity across diversity in a general systems perspective of Islamic political economy as premised on its epistemological roots.

Our principal objective in this paper is to place Islamic economic thinking in a distinctive paradigm of its own in comparative perspective of economic theory as it has evolved and indeed as Islamic economics itself has evolved. Thus we will take a critical examination of these alternative premises of economic thinking while laying down the epistemological foundation of the worldview of human inquiry in Islam. Within this world view can be discoursed economic, social and scientific issues and problems. We will then explain some usually known Islamic economic and financial instruments within the paradigmatic worldview that we will establish on epistemological grounds.

In occidental history of economic thought there were two major path-breaking revolutions, classicism and Keynesianism. Although many other ones can be taken up within these major classes of thinking, we will devote to the parent ones only. We will also see that the search for new thinking in economics in recent times has once again found itself gripped in one or the other of these schools or a combination of the two.

The First Revolution in Economic Thought: The Classical Economic School

Classical Economic Orthodoxy: Adam Smith

The classical economic school gave a scientific theory of market capitalism. Yet classicism was more than a mere study of egoistic behaviour of self-interested individuals in a market venue. Rather, Adam Smith’s Wealth of Nations is a compendium of social and economic issues in which institutions and governments are seen to play distinct roles in attaining efficient organization of markets. Yet the kind of orientation given to public organization in the midst of self-interest, and in this way, the method of externalizing social values through institutions and governments, assume a particular form in this first great revolutionary and monumental work. We will explain this now.

Smith’s first work, The Theory of Moral Sentiments received greater attention during his life than the Wealth of Nations. The latter work became prominent only posthumously. In Moral Sentiments Smith saw human sympathy to be emerging from the springs of natural liberty. The principles of natural liberty respecting human liberty and happiness were made to premise individual, social and institutional aspirations. In methodologically explaining such preferences, Smith wanted to see scientific laws of natural liberty become its part and parcel. Thereafter, institutions became representation of such individual preferences if they were founded on sympathy, ethical behaviour and just exchange for benefiting from the various possibilities that the human order can bestow. Thereby, within such a scientific system endowed by its equilibrium and optimal principles of natural liberty, goods and services comprised not simply purely economic ones but also moral and ethical ones. Today John Rawls calls social and ethical market values to be ‘primaries’ (Rawls 1971). In this sense, Smith emulated Aristotle’s economic thinking in terms of ethical perfection, which the latter wanted to utilize as the attributes of a good society with wealth and politics in it. These points are brought out eloquently in Aristotle’s Nichomachean Ethics (Welldon 1987, Barker 1959). Smith was also like Kant in his moral prerogatives. Kant found epistemological questions of history, society, economy and politics to be embedded in what he called as the universal law of history (Reiss 1970).

But like Aristotle, Smith’s institutions and government were a lateral aggregation of perfect individuals all transformed by a vision of natural liberty in the quest for freedom and happiness characterizing the human order. Institutions just as individuals were thereby, assumed to be capable of attaining the optimal and equilibrium levels of freedom and happiness. The market order characterized by exchange of atomistic individuals then became a necessity for institution to realize this kind of free and non-interventionist attainment of freedom and happiness.

The natural liberty principle of Moral Sentiments thus led to the emergence of the markets of Wealth of Nations. These were made up of self-interested, optimal and equilibrium modes of exchange and agency under such an atomistic market assumption. Consequently, we find that in such an aggregation of individual preferences toward forming institutional preferences all of economic analysis became an academic venture in optimal allocation of resources. The high moral, ethical and social values earlier conceived by Smith in his Moral Sentiments got washed away in his Wealth of Nations, wherein market exchange and the role of institutions and governments in this order became the prime sway (Coase 1994).

In the assumed state of optimality and equilibrium allocation of scarce resources among exchangeables, the agents had to become independent of each other, not interactive ones. In this way, the exchange mechanism was invisibly premised on the exchange of atomistic agency, which by selling small and being small while being many, could not explain a process of evolution of market exchange within a scientific paradigm of markets and ethics. In other words, while optimality and equilibrium of resource allocation were assumed to exist, yet it was not known how such an optimum and equilibrium state was attainable through a social process (Shackle 1971). A process is understood here to mean a continuous system of interactions, convergence and re-emergence through a vast nexus of cause and effects (Whitehead 1979).

In the post-hoc optimal state there cannot exist any sharing possibility between agents, variables and sub-systems (e.g. markets). Hence the possibility of interactions disappears in the long-run optimal state of resource allocation. Agents were assumed to have already conceded at every point of the resource allocation trajectory to consistent optimal and equilibrium states. This is the focus of economic analysis in the classical school. The representation of aggregate preferences of individuals and groups in institution making became stronger in the theory of civil libertarianism propounded by Bentham. From this background the occidental world inherited the idea of utilitarianism, that is sum-ranking and interpersonal comparison of utilities (Bentham 1789, Harsanyi 1955, Hammond 1987).

Thus in the first revolution in economic and social thinking we find its focus to have been on a scientific explanation of human action in accordance with the principle of natural liberty. But this very scientific approach led to a design of the market order, institutional order and social systems that got premised on optimality, equilibrium and individualism. Consequently, no substantive understanding of social interactions could be offered in explaining the passage towards a final equilibrium and optimal state of viable socioeconomic variables. When individuals lost their capacity to discourse even as they attained their assumed optimal and equilibrium states of happiness and freedom, they also lost the capacity of being ethically active. Ethics and markets thus got dissociated. Ethics became exogenous to economics and market function.

Neo-Classicism

In the neo-classical economic school that followed the works of Walras, Jevons and Marshall, the classical economic ideas were perpetuated on the demand side of markets. Earlier, the classical economic school had focused on the supply side. Neo-classicism further entrenched the theory of self-interested preference behaviour of individuals into a theory of social optimum and equilibrium, albeit introducing such preferences into a systems view of multi-markets.

Preferences in turn were treated as the origin of economic value in relation to relative prices. Relative prices of the neo-classical school explaining economic choice, and absolute prices of the classical school representing economic value had to be empirically observed. Hence all goods and services had to be measured. Even when numinous social goods and services entered exchange, they had to be treated within the purview of measurement in order to be considered in economic analysis. Encompassing these constrictions were the axioms of rational economic behaviour of agents, full or bounded information (hence bounded rationality), and measurable probability of uncertain events. This convenience was essentially required for determining the structure and bounds of a reductionist economic space. Reductionism is not even limited to economics in such doctrines. It is found inherent in the sciences as a whole. Against this constricted view of science Dampier has written his incisive critique (Dampier 1961). Such a priori needs for boundedness to attain assumed states of optimality and equilibrium remained structurally invariant over time in the economic space. As a consequence of assumed predictive nature of economic reasoning, time in it becomes non-substantive in neo-classical economic theory (Robinson 1965, 1973). Prediction remains structurally unchanging as a prescribed human behaviour, irrespective of time-dependent change of the economic variables.

Institutions now are once again structurally embedded in the lateral aggregation of independent, optimal and equilibrium preferences as manifested by the utilitarian doctrine. Such a society-wide behavioural assumption in neo-classical thought is termed as methodological individualism. Because of such logical continuity of neo-classicism to classicism we will not treat this school as a distinct revolution in economic thought.

Neo-classical economic school introduced the method of marginalism to treat resource allocation among competing ends under scarcity. But in doing so they turned such allocation points into axiomatic long-run optimal and equilirbium points. Consequently, marginalism became a powerful method that intrinsically stayed in neo-classicism and gave it the abiding structural character of a non-interactive worldview. Marginalism thus explains non-interaction and relates this state to optimality, scarcity, and equilibrium in the long-run. By thus making individuals and institutions choose in the absence of systemic learning at the marginal points of resource allocation, the method of marginalism intensified the view of methodological individualism in neo-classical economic behaviour (Parson 1964).

Marx Briefly

For similar reasons, since Marx was an exponent of the classical economic school albeit with a much wider agenda of social interactions, we will subsume Marxism within classical economics. Yet it must be mentioned in the context of the theme of this paper that the great debility of Marxism despite its attempt to explain social interactions arose from Marx’s silent negation of markets and3 his duality of prices and values in the economic system (Mandell 1971,Ghosh & Choudhury 1997). Such dualism replaced the meaning of market exchange by institutional re-organization, principally of production rather than of consumption (Martinez 1990). In this, economic planning subsumed the market function. Historicism rather than praxis (von Mises 1976), which has its roots in markets and ethics, was made the explainer of economic change. Contrarily, as von Mises wrote (1960): "Theory as distinct from history is the search for constant relations between entities or, what means the same, for regularity in the succession of events. In establishing epistemology as a theory of knowledge, the philosopher implicitly assumes or asserts that there is in the intellectual effort of man something that remains unchanged, viz. the logical structure of the human mind."

The Second Revolution in Economic Thought: The Keynesian School

The Economic Orthodoxy of John Maynard Keynes

The second great revolution in economic thought was by John Maynard Keynes. His General Theory of Employment, Interest and Money bequeathed to academia a different way of looking at the aggregate economic universe. Aggregation was not derived from the notion of sum-ranking of individual preferences at the institutional level. Likewise, markets do not exist in Keynesian analysis. It is only that aggregate market effects are analyzed at the institutional level. There are no decision-makers; even government is not a decision-maker in Keynesian analysis. It is only that the economy-wide effects of decision-making taken elsewhere, are analyzed aggregatively. Consequently, Keynes gave an idea of economic and social aggregation different from its classical and neo-classical meaning.

Instead, in Keynesian economics aggregation of economic variables and activities is associated with large institutions that already find their place in society and economy for protecting the interest of citizens in democratic and free-market capitalism. Consequently, while to the utilitarians Government is a representation of aggregate preferences of optimal individuals and is in turn charged to look after and promote the same preferences, to Keynes the idea of Government in economic analysis is an institution entrusted to safe-guard the national economy. General Theory thus marked a new way of conceptualizing a general system of equilibrium interrelationships and analysis within this framework for the common good.

Keynes was thus a deep epistemologist like Smith in developing this paradigm of aggregate and systemic view of social relations (O’Donell 1989). However, even in this structure of economic and social thought and despite the fact that Keynes like Smith was moved by the central role of ethics in economic matters, he was unable to explain a value system in his economic analysis. Problems arise due to the absence of decision-makers in Keynesian aggregate economics. Likewise, Keynes’ general equilibrium analysis being premised on the explanation of systemic causality among large institutions in key sectors, is not centered on the explanation of visibly human interactions. Thus once again, like the classical and neo-classical economic schools, Keynesian general equilibrium had to be attained on the assumption that economic equilibria exist conjointly in four principal sectors of the economy with or without economic policy impact. These sectors are the product market, the labour market, the money market and the expenditure sector. The expenditure sector is simply the result of the other three sectors.

When Keynes considered economic policy in his general equilibrium framework for these sectors, he launched a new idea beyond the stable equilibrium concept of the neo-classicists. Keynes thought of an inevitable existence of under-employment equilibrium and downward inflexible price levels even in the best performing capitalist economy. He then set to improve such an under-employment to full employment by activating national output. Economic entropy and its correction is thereby inherent in Keynes’ vision of the social and economic universe. Consequently, principal policy variables, such as, government expenditure (fiscal policy) and monetary policy for attaining full-employment equilibrium were meant to improve the state of the economy by improving the equilibria in the four sectors, to a full-employment output level beyond under-employment equilibrium.

Price stabilization was not a pre-occupation of Keynes, for full-employment was attainable in his general equilibrium system by a mobilization of under-utilized resources into productive ventures using fiscal and monetary policies (other policies can be tied to these). It was then these productive ventures that subsequently generated the income multiplier for attaining full-employment output. Full employment, government expenditure for social economic stimulation, productive investments, need for low interest rates, economic policies and the general equilibrium framework based on these conditions, were essential elements of Keynes’ ethico-economics. Keynes as an ethicist wrote in his Essays on Persuasion (1930): : A somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands down over with a shudder to the specialists in mental disease."

What then was the flaw in the aggregate economics (macroeconomics) with respect to Keynes’ ethical epistemology in economics? The absence of ethical perceptors (preferences) needed to perform the ethical acts created the ethical dysfunction. Consequently, there was no human discourse and hence no interaction toward explaining a systemic process. We referred to this problem earlier in relation to the predicaments of the classical and neo-classical schools, wherein ethics remained exogenous to economic matters. Because of a similar ethical exogeneity in Keynes’s economic system, one cannot decipher the ethical elements of productive ventures into which resources are to be directed for attaining simultaneous general equilibria in the four sectors earlier mentioned.

Ethics and Economics: Recent Economic Thought

We have shown that both in the case of microeconomics emanating from the classical and neo-classical economic thought and macroeconomics from Keynesianism, the integration of ethics into economic values and market exchange remained a central focus. Yet such a goal defied the scientific methodologies of these schools. Ethics and economics were indeed epistemologically thought to be inseparable in all of economic thought from the very beginning. The problem of blending the two appeared due to the absence of what we claimed is a process-based systemic explanation of the social, economic and scientific universe. A substantive methodology of process orientation could otherwise have integrated and unified ethics with the purely economic elements.

The problem that economics has always encountered is therefore one of rendering a socio-scientific paradigm that can treat ethics in it as an endogenous value element with the full force of a substantive scientific analysis (Bohr 1985,Einstein undated). In other words, epistemologically once again, we are searching for a worldview that would unify the knowledge premises of all disciplines according to a systemic framework of interactions, convergence and creative emergence.

In recent times feverish search has been launched for such a paradigm. We are not to lose sight of Herbert Simon’s classical book, Models of Man (1957). There is also the Austrian economic orientation in innovative development that was particularly mastered by Schumpeter (1934), but which faded with the coming of the new-classicical concept of market catalysis in Hayek’s work (1976). Such systemic learning-by-doing ways of re-thinking economic processes are once again occupying increasing interest in recent times (Georgescu-Roegen 1971, Kirzner 1997).

The birth of evolutionary economics followed the works of Boulding (1967, 1968). The main thrust of these studies is in the direction of explaining dis-equilibrium, chaotic and even equilibrium-converging models of social reality. Yet recent literature on evolutionary economics could not disentangle itself from neo-classical economic methodology (Nelson & Winter 1982). Hence a substantive theory of knowledge in economic change is fading away from evolutionary economics under the neo-classical influence. Recently, the social contractarian approach of Buchanan (1975), Buchanan & Tollison (1972) and the historistic economic studies propounded by North (1981) have also tied our attention to the search by the economic academia for a process-oriented explanation of economics, society, institution, politics and constitution (Choudhury 1998a)

Sen’s Ethics and Economics

Among the very important contributions given to the field of ethics and economics are by Sen (1990). Of particular interest are Sen’s philosophical writings in re-orientating social welfare and social choice theories in the direction of explaining economic preferences that can be functionally determined by ethics. Here Sen ventures in examining how individual preferences can be formulated by imputing the sense of rights and duties in them (deontological) and thus explaining the consequences of such rights and duty bound preferences in market exchange (consequentialism). Sen’s ideas of social well-being are premised on such deontological consequentialism ans examined analytically. The social and interactive aspects of studying such preference formulation by analytical methods are evident in Sen words (1990, p. 75): "To get an overall assessment of the ethical standing of an activity it is necessary not only to look at its instrumental role and its consequences on other things, i.e. to examine the various intrinsically valuable or disvaluable consequences that this activity may have. What was called the ‘engineering’ aspect of economics has a parallel within ethics itself. It may not be as central in many ethical problems as it is in mainstream economics, but it can be important enough."

What is then the methodological problem with these more recent attempts in explaining ethico-economic integration in the light of a systems orientation? An answer to this question is found in noting that the neo-classical assumptions of bounded economic rationality remains intrinsic in the postulates of social choice, welfare economics, institutional economics and public choice theory. Along the line of academic discourse launched by Sen and several philosophers, most notably Rawls (1971), Nozick (1971) and Dworkin (1978) in recent times; Kant (1964), Hume (1992), Husserl (1965) and Hegel (1956) of an earlier vintage, there remains a lack of substantiating the premise of a fundamental epistemology explaining unity of knowledge pertaining to ethico-economics.

The social and economic doctrines referred to here are left instead to a concept of unity that breeds on the rationality perspectives of mental plurality, or else there exists no essential premise to foundationally define the episteme of unity of knowledge. New quests are today appearing in the intellectual domain of unity of knowledge in the physical sciences, but to date the inquiries have been limited to the unification of physical reality alone and that too without definite success (Barrow 1991, Hawking 1988). On the other side, the classical works on unity of the sciences could not establish a fundamentally pervasive methodology for the sciences (Neurath et al 1970, Nagel 1961). In economic theory we find the dichotomy of economic reasoning, inference, perception, price level and output between microeconomics and macroeconomics. Such a methodological dichotomy is also the case with the ideas of large scale and small scale universes of theoretical physics.

The idea of plurality as a necessity but posing a deep problem of measurement and harmonization of methodology can be found in Sen’s works. Sen finds unacceptable problem with a unified or ‘monist’ scientific approach. He writes in this regard with a view of rejecting the idea of ‘monist’ unity (Sen 1990, p.62): "Not only is there a unified and complete view of ethical goodness (weighing the different objects of value vis-à-vis each other), but even the objects of value must be all of the same type (singular and homogeneous) in this ‘monist’ conception."

Need for Endogenous Ethics in Economics; Systems Approach

Now at the end, it is again the properties of neo-classical preferences despite their invoking of ethical questions that negate the place of unification of knowledge across agency, goods, systems and their interrelations. Ethics in such a rarified premise of rationalist plurality cannot be epistemologically endogenized within a systemic framework that can be endowed by extensive and strong interactions across all systems. Though even with such a universal re-configuration of scientific epistemology, problem specificity across disciplines will remain, but the methodology will be uniquely unified

Thus for a real breakthrough in the domain of ethics and economics we are to continue our search for an epistemological premise that can scientifically establish and then explain ethics as an endogenous reality of all systems. A particular one of such systems is the economy and markets, interacting agents and institutions, their needs and social relations. Having rejected the reasoning of mainstream economics with respect to an endogenous treatment of ethics we are left searching for that fundamental unity of knowledge at the epistemological core of a scientific understanding, explanation and application. We must establish such a methodology of general systems across all disciplines. This is indeed a search for a meta-theory of systemic unity with extensive interdisciplinary explanatory power.

Thus we enter the study of the structure of Islamic economics. Even here, Islamic Economics is a terminology that we must finally have to abandon because of its blind following of the methodology of mainstream economic and ethical doctrines, which can hardly be defended on grounds of the precept of unity of knowledge found in the Qur’an, Sunnah.

The Structure of Islamic Systems Oriented Reasoning : Endogenizing Ethics

With the limitations posed by ethically-neutral perspectives of economic theory premised on the axioms of economic rationality and philosophical rationalism and on the inherent plurality of knowledge in these, unity of knowledge across systems can neither be defined nor attained. This debility has stood in the way of treating ethics endogenously within socio-scientific comprehension.

In Islamic socio-scientific worldview the fundamental root of knowledge is the Unity of God. This Precept of Oneness is both of the essence of the unity of Being as well as the unity of Divine Laws. The Divine Laws are seen as the spring of absolute and complete knowledge. While the ontology of Divine Oneness is not manifest, yet the epistemology of the world-system premised on Divine Oneness is manifested in terms of the unity of knowledge. Such an externalizing of the Divine Laws reveals the fundamental unity of Being, of the Divine Laws and of the world-systems constructed on these. The Qur’an is profuse with verses invoking and exhorting human beings to search out the signs of divine unity in the order of things by contemplation and observation.

Islamic reality is thus an expression of the Signs of God in terms of His Oneness as expressed in the fundamentally unified essence of the universe and of everything in it. The structure of Islamic economics, taken to mean the epistemology of Islamic economics, is premised on the unity of knowledge in its ontological and empirical sense.

But although God is One and complete and absolute in knowledge, He has bestowed only a little of this knowledge to world-systems including individuals, societies and scientific universes embedded in world-systems. Yet within this limited scope of knowledge He has created stages of advance that are attained by a progressive and incessant comprehension of the Divine Laws and His Signs. These are comprehended through God-conscious search. Consequently, the dynamics of knowledge production in understanding the unified nature of the universe, its systems and sub-systems are based on incrementalism, God-consciousness and the consequential development of cognitive powers (observations). Reason then becomes the result of such attributes that come to the inquirer from his conscious search for the Signs of God in world-systems.

What is Knowledge?

The concept of knowledge that we will use throughout this paper should be explained now. Knowledge that is absolute and complete with God is the Complete Stock of Reality. It neither waxes nor wanes; it is not observable entirely, but is always comprehended in increments. The Stock of Knowledge is the source of all knowing in world-systems. Entities, be they human or non-human, including systems variables and their relations, learn in an interactive mode to reach increasing consciousness by deriving flows of learning inputs from the Stock of Knowledge. Since the Stock is fundamentally unified in the sense of Divine Oneness as its cardinal attribute, therefore, derived knowledge flows are of the same essence of unity. Interactions are thus epistemologically made to converge to the comprehension of reality. Comprehension, observation and construct in Islamic world-systems are determined by the emergence of such flows of knowledge premised on fundamental unity. Such derived forms then generate the world-systems. The knowledge-induced world-systems thereafter, generate new springs of knowledge flows.

While the Oneness of God gives the Complete Stock of Knowledge, ‘flows of knowledge’ (or ‘knowledge flows’) on the other hand, constitute learning in the universe on grounds of the epistemology of fundamental unity. This learning experience is to acquire God-consciousness, to observe the Signs of God and to construct world-systems by means of that consciousness. Interactions leading to integration and further emerging to new rounds of interrelationships between fundamental epistemology of unity and the unified world-systems premised on this consciousness, determine the experience of knowledge flows.

Incrementalism in knowledge flows as so attained marks the progressive advance of individuals and societies and with these of world-systems into greater springs of knowing. It also means the reality of differentiating truth from falsehood in this same progressive mode. The creative and evolutionary powers so acquired by the agents and world-systems are explained in the various designs, methods and mechanisms of man. What emerges from such an intellectual inquiry is the search by increments of knowledge flows premised on Divine Unity (Divine Laws) for the essence of the universe that is fundamentally unified in its revealed form across diversity.

These attributes of unification epistemology form the three core parts of the methodology of Islamic socio-scientific systemic analysis as schematized here:

Complete Stock=Full and Absolute Knowledge (Divine Laws)

® S Acquired Knowledge [1]

® I World-System [2]

® I Creative Evolution to more knowledge [3]

® I repetitive cyclical continuity in this order.

Here, Complete Stock denotes Divine Knowledge as embodied in the Qur’an.

‘S’ denotes Sunnah (enlightened guidance of Prophet Muhammad) and the role it plays in the order of comprehension, acquired knowledge and application of the Divine Laws in world-systems. The combination of Qur’an and Sunnah establishes the Fundamental Epistemology of Unity for human reason and cognition. From these roots arises the core of Islamic Laws (Shari’ah).

The World-System is any selected domain with diversity in accordance with the issues and problems under study and in which unity of knowledge is reflected. Thus there exists the axiom or the ‘principle of universal complementarity’ that unifies the diverse number of events in world-systems according to their acceptability of similars. These are the separate categories of truth and falsehood as Qur’anically understood. They are seen to be systemically unified in themselves but as being mutually exclusive to each other. Falsehood is termed here as ‘de-knowledge’ (Choudhury 1995a). Its attribute in the unification plane is one of maintaining the essentially rationalist, random and pluralistic character of individualism that it endows. Note is to be made of the quite distinctive use of the term ‘world-system’ in the sense of worldview developed in this paper from that for the power centric concept of capitalist world-system given by Wallerstein (1974).

‘I’ denotes the process of discovering rules of life and thought from the fundamental sources of Qur’an and Sunnah. While the epistemological core of Shari’ah lies in the Qur’an and Sunnah, the worldly details of Shari’ah are simulated by the discursive process of ‘I’. Some of these discourses belong to the area of formulation of appropriate rules, methods, instruments, policies and institutions. The process of interactions is explained in the Qur’an to exist in both the animate and inanimate realms. Hence there are interactions among agents, institutions, entities, variables, systems and their interrelations.

Next, these interactions among diversities of world-systems lead to integration (also referred to as consensus and convergence). Thus there is convergence is a limiting process attained through interactions (discourse) among a plethora of discursive knowledge flows on the issues under investigation.

After interactions lead to integration, a creative order of world-systems is re-generated by further emerging springs of knowledge flows from the acquired experience of previously knowledge-induced world-systems. Creative evolution is premised on the same process as explained so far. Such a complete process that takes the unity of knowledge as the epistemological premise for understanding world-systems through interactions leading to integration and followed by creative evolution in continuity, is the Qur’anic dialectical process of shura. We will call this knowledge inducing process to and from creative world-systems as the shuratic process. It is to be noted here that the shuratic process is taken in the vastly universal meaning of interactions as presented by the Qur’an and not simply that which is restricted to the political domain.

Endogeneity of Ethics in Islamic Socio-Scientific Order

Endogeneity of ethics in Islamic socio-scientific world-systems means the realization of the shuratic process in determining possibilities of life and thought according to Shari’ah. These possibilities then determine world-systems. To these world-systems belong markets and the economy. Now such human realms do not and cannot exist in isolation of the greater complex of human systems. Such a systemic interrelationship is necessary in order to maintain the strong and pervasive interactions, integration and creative evolution across extensions realized with the progress of knowledge flows rising from lower to higher levels of certainty.

According to Ibn al-Arabi and the atomism philosophy of the Asharites (Qadri 1988) the universe was seen to be pervasively of the essence of the Oneness of God in the order of things. Ibn al-Arabi wrote on the process of knowledge formation (Chittick 1989):

Two ways lead to the knowledge of God. There is no third way….

The first way is the way of unveiling. It is an incontrovertible knowledge which is actualized through unveiling and which man finds in himself. He receives no obfuscations along with it and is not able to repel it. He knows no proof for it by which it is supported except what he finds in himself….

The second way is the way is the way of reflection and reasoning (istidlal) through rational demonstration (burhan ‘aqli). This way is lower than the first way, since he who bases his consideration upon proof can be visited by obfuscations which detract from his proof, and only with difficulty can he remove them."

Ibn al-Arabi continues on to write as translated by Chittick:

Any knowledge outside of tawhid (Oneness of God) leads away from God, not toward Him. But knowledge within the context of tawhid leads its possessor to grasp the interconnectedness of all things through a vast web whose Center is the Divine. All existences come from God and go back to Him" [edited].

According to Imam Ghazzali in his Ihya Ulum Id-Din (Vol..2) (Epistemology of Divine Knowledge), Shari’ah is formulated by the reformation of the self and soul away from wants (Karim undated). In fact it is reported that Ghazzali never believed in the market function determining the law of demand relating prices and quantities as in the classical economic school. Instead, he considered all price fluctuations to be an act of God and not of any law of demand. The deep import here is that endogenous ethical elements in market exchange can alter the assumed axiomatic predictive relation between price and quantity in the demand function (Islahi 1995).

According to Imam Fakhruddin Razi the basis of life is obedience to God which he takes as the root and essence of needs fulfillment (Noor 1995). Razi can be seen as the much earlier forerunner of the recent days social psychology theory of self-actualization given by Maslow. For a schematic design of this process see Lutz (1988). However, the structure of the needs fulfillment theory of obedience to God (Ubudiyya) given by Razi is inverse of Maslow’s and exists in continuum not in heierachies as in Malslow’s (Choudhury 1995b).

According to Imam Shatibi in his Muwafaqat fil-Usul al-Shari’ah (Treatise on the Epistemology of Shari’ah), the rights of individuals are formed by the principle of social well-being through discourse and opinion (Choudhury 1993). These are the social interactions leading to integration in or paper. Muwafaqat gave the early version of the concept of social well-being in Shatibi’s theory of Al-Maslaha wal-Istihsan, a study of social preference making through discourse on issues of public purpose. Such ideas have come into economics only recently.

According to Ibn Taimiyyah in his Al-Hisbah Fil Islam (Social Guidance of Markets), the needs of social justice prevails over unbridled market competition. Hence a socially acceptable ethical guidance of markets was seen to be necessary (Holland 1983). This was seen to be necessary despite that Ibn Taimiyyah’s did not dispel the importance of market process that is so clearly promoted by Shari’ah.

According to Shah Waliullah in his Hujjatullah Baligah (Introduction to the Study of Social Change), historical change is a complex of interrelationships among emerging systems and stages of life starting from primitive societies to advanced ones. These ideas of Waliullah’s theory of social change are discussed by Ghazali (1990).

In all of these classical contributions to social and economic thinking among leading Islamic scholars we note the epistemology of Oneness of God and Shari’ah as the conveyor of that Oneness into life and action has played central role in determining all kinds of rules and conduct for individual and social life. We also find in these the presence of knowledge-induced interactive and integrative approach to social meaning. Consequently, the concept and formulation of social well-being, contrary to the theoretical impasse caused by the plurality doctrine of philosophical rationalism, individual rational choices and social choice in Sen’s writing, is seen in the Islamic framework to be the result of a substantive process. This shuratic process emerges from, subsequently realizes, and then creatively evolves along the unification process of knowledge flows. In this very process individuals and society are conformably transformed across and within themselves. Systems thus unify across agents, variables and their interrelations.

Markets According to the Principle of Ethical Endogeneity in Islamic Economics

We will now characterize the nature of markets in the Islamic endogenous ethico-economic order. Contrary to Smith’s invisible hands principle and the assumed post-hoc optimality of resource allocation where learning and knowledge cease at the points of optimum and equilibrium either in the midst of full or bounded information (rationality), markets in the Islamic order are ethically guided although not intervened unduly by institutions.

The interactive, integrative and evolutionary nature (henceforth IIE) of the shuratic process implies that market contracts are continuously made according to simulating rules, choices and resource allocations premised on Shari’ah guided economic and financial instruments. Such processes of discourse and contracts generate continuous flows of knowledge. The interacting legal, ethical, material and institutional elements mark the nature of inter-systemic interactions. On the other hand, the complementarity among prices and quantities for the Shari’ah prescribed orders continuously enhanced by knowledge flows, defines a resource allocation and pricing behaviour that is quite contrary to the methods prescribed by marginal utility on the demand side and by marginal productivity on the supply side. Technological change in the demand, supply, production and social well-being functions is seen as transformation through which emerging processes of requisite knowledge flows are realized and transmitted for implementation in order to attain complementarity across diversity.

The Social Well-Being Function and the Social Well-Being Index

The social well-being function is now seen as the benefit derived from the consumption choices of bundles of goods and services determined by a continuing shuratic process enabling complementary choices to occur (Choudhury 1996). The concept of utility function is replaced by individual choices of goods and services that are complementary in themselves in providing benefits. Such benefits are themselves the result of another level of complementarity. This is the complementarity between knowledge and material objectivity. Instead of consumer utilities, social well-being indexes understood in the sense of complementarity among goods and services for consumption purposes, functionally characterize the social well-being function (Choudhury 1992).

The Production Menu

The production menu is the result of complementarity between labour and capital (also other factors of production) in the knowledge-augmented form. This is an issue of technological change, the choice of the goods to produce and to consume, and the institutional participation required to determine such choices by discourse. Thus by the idea of complementarity among factors and goods in the production menu we mean such a complementarity being realized by interactions, integration and creative evolution in the shuratic processes pertaining to a complex of participation among social agents, individuals, variables and their interrelations.

Resources and Prices of Goods and Services

Resources are continuously augmented by knowledge flows. Through the emerging diversities of economic possibilities and complementarity among them, risk and product diversification occurs. Thereby, cost and risk decline. Such a resource generation can be the result of many factors: avoidance of waste, new discoveries through active productive investments, participatory enterprises that develop human resources, choices of dynamic forms of needs fulfillment development regimes, institutional organization based on cooperation and extensive joint ventures, and formal as well as informal ways of guiding the economic agents towards proper modes of production and consumption menus (Choudhury 1998b).

Prices in such a resource allocation system are those resulting from complementarity among goods and services. That is, they are determined by market exchange with complementarity embedded in it. This property of Islamic resource allocation is similar to price determination in classical economic theory, but the goods are ethically induced by knowledge input from continuously guiding social institutions. Such prices can only occur as a result of extensive systemic linkages, whereby participation in the broad sense of complementarity exists. Also they are the result of a needs-oriented economy where complementarity is necessary to sustain diversity. Development regimes are thus of the dynamic (i.e. evolutionary) needs-oriented type. In this sense therefore, the Islamic market is not different from a classical economic market in terms of the needs-oriented goods and services exchanged. However, ethical endogeneity in exchange alters the nature of exchange relations.

Profits

Because of this nature of the Islamic economy, profits are generated on the basis of near normal profits, since market contracts will determine the margin of error in the pricing of goods for profits that can be subsequently shared among partners. Such errors in market contracts can result from non-optimal learning games that participants play between themselves. Between consumers and suppliers, prices in exchange are determined by the ethical response to appropriate goods from the side of the knowledge-induced demand and preference functions of the consumer. To this the supply function and the production function respond. Besides, production menus are of the participatory type with discourses and decision making occurring between labour and owners. Such a participatory environment also determines the nature of goods and the menus of production with social awareness in them.

Profits are near normal profits also because of the regime of dynamic basic needs baskets of goods and services that are demanded and supplied in the Islamic economy. Such dynamic needs fulfillment baskets preserve price stability and make the revenues depend principally on the production side. From the side of an appropriate choice of technology, such a regime of development likewise causes profits to be generated on the basis of output. Thus output plays a primary role in the participatory nature of sharing in the resources and returns of production. Prices remain stable at each evolutionary juncture of dynamic basic needs regimes of development. The picture is similar to the classical treatment of needs in market exchange. Yet the resource allocation occurs through complementarity between goods, services and agents of demand and supply. This becomes a function of knowledge flows that enable such complementary interactions to occur and then lead to integration and dynamic emergence of choices of the basic needs regimes of development..

Factor Pricing

On the side of pricing of factors of production, the derived demand for factors are functions of factor prices and prices of goods and service. Since productive factors remain complementary due to the factor-augmenting technological change, therefore, their prices also move in the same direction. In all of these cases, knowledge flows as interactions leading to integration and creative evolution of new knowledge as a dynamic process, play the fundamental role.

The supply of factors of production is not based on factor marginal productivities. Rather, it is determined by the effect transmitted by the demand side. Hence here too, much of the equilibrium aspects of classical factor markets exist, but now with endogenous ethical effects in existence, as caused by the continuous production of knowledge.

Economic Distribution

Between the demand and supply sides of the factor and product markets we now have the resolution of the economic distribution problem. The true worth of the things exchanged, be these goods or services of factors, is based on their value as determined by use in exchange and by intrinsic value embedded in them. Intrinsic value is discovered through ethically induced market exchange. Although such a value is not measurable yet it influences the net price in exchange. The concept of value in exchange is now that of net value of effort and exchange after intrinsic value, as naturally embedded in the exchangeables, is discounted from the price as a return either to the seller or the productive factor. Intrinsic value is not observed but it is revealed through morally conscious (preference formation) exchange in ethicizing markets toward determining supply prices

Idea of Priorities and Specialization

In the milieu of complementarity among factors and the simultaneous movement of their prices determining similar consequences on prices in the market for goods and services, the additional question is that of economic priority and specialization. We have already explained that ‘the principle of universal complementarity across diversity’ in the space of goods, factors, resources and prices, completely negates the neo-classical postulate of marginal substitution.

Similar concepts of marginalism that have inhibited scientific analyses of steady-state change are also re-conceptualized in terms of knowledge-induced simulative methods (Choudhury 1998c). Thus our examination of the topic of priority and specialization must be based on the principle of universal complementarity across diversity in all systems. The principle remains a view polar to the postulate of marginalism( Daly 1992).

If one were to further represent such a knowledge-induced resource allocation across economic possibilities, the trajectory of the allocation will be a perturbed path. Perturbations here are the result of continuous induction of variables and events by knowledge flows. That means both the concept and the methods of optimality and optimization are dispensed with in the light of the attribute of knowledge formation. As we explained earlier, such knowledge flows evolve incrementally through the dynamics of the shuratic process. In spite of the perturbed nature of simulative trajectories, integrity of the knowledge-induced pattern of evolution is maintained as long as knowledge flows are continuously evolved and integrated through interactions. Thus there exist evolutionary equilibria in the Islamic resource allocation regimes in the sense of sustaining the pattern of shuratic epiphenomenon (Grandmont 1989).

Priority of choice in knowledge-induced resource allocation would nonetheless imply that certain possibilities are incrementally used, preferred and demanded more than other ones. Yet such a choice reflects simply a measurement of the relative degree of variations in the alternatives over space and time. But, in spite of such variations, the movements of alternatives keep in tact the monotonically positive directions of all prices. The idea of prioritizing choices therefore, does not mean marginal substitution of one for another. Rather, the first order change always remains positive, although the second order change may be relatively negative and varying according to the existing moments of knowledge induction as the simulation of the shuratic process proceeds.

Other arguments arising from the side of the principle of universal complementarity that annuls the neo-classical postulate of marginalism, are that any reversal to a marginalist picture in resource allocation in Islamic markets is a case of temporary or permanent slowdown in knowledge production. In the case of a temporary slowdown in knowledge production we have an instantaneously very short-run event. Such an event has no significance in economic movements and change. On the other hand, only in the case of the long-run permanent demise of knowledge flows can a full return to neoclassical resource allocation be possible. Such a neo-classical state of resource allocation would be once again described by optimal and non-sharing agents. These are also the characteristics of methodological individualism, earlier referred to in terms of independence and marginalism among competing agents. In all such cases the meaning of interactions breeding knowledge flows, process and reality, is lost.

Specialization is seen in the shuratic process order as the ‘intensity’ of certain choices of technologies and means of production to develop linkages across sectors, goods, resources, factors of production and other possibilities. Such linkages being direct functions of knowledge flows caused by the existence of complementarity across diversity, would mean the development of possibilities in the economic space as caused by interactions. Consequently, while specialization would continue to mean an efficient method of attaining output, such a method would not remain opaque but rather will be transparent to all cooperating agents. This idea of a specialization process comes nearer to the innovative learning process of the Austrian economic school that allows for systemic interactions to remain embryonic in the innovative specializing paths of entrepreneurship.

The Central Role of the Principle of Universal Complementarity across Diversity

In the end we note that the knowledge-induced structure of Islamic market economy is premised on complementarity within diversity. These are signs of integration (complementarity), which is a cardinal sign of unity of knowledge arising from interactions (diversity). They are then evolved to reproduce knowledge that empowers the further understanding of unity, and thereby, of organizing the emerging world-systems. The study of Islamic markets and economy cannot therefore, be an isolated study of pure and simply economic matters alone. Rather as the meaning of specialization in this system was explained, economic structure as any other disciplinary structure in the light of Qur’an, Sunnah and Ijtihad (deriving knowledge from the primal epistemological sources), is inter- and intra-systemically unified through the shuratic process. This is the process that reveals knowledge and organizes it in world-systems through the methodology of understanding, observing and realizing interactions within integrating orders leading to continuously creative evolution of the same.

The Instruments of Islamic Economy

In light of the IIE process-centered understanding of socio-scientific reality, all Islamic economic and financial instruments are to be taken up in such a systemically unified knowledge-induced general equilibrium framework. The instruments so developed can then be explained in terms of causal interrelationships. The epistemology of Divine Unity and its reflection in these instruments can then be made to explain the endogenous nature of ethics (i.e. knowledge flows) within a systemic world view of unity of knowledge.

The five major Islamic economic and financial instruments are, (1) abolition of interest, (2) profit-sharing under economic cooperation between labour and capital, (3) joint ventures, principally though not wholly through equity participation; (4) the institution of charity; (5) avoidance of wasteful use of resources. Many more instruments can be evolved from a combination of these five.

Abolition of Interest

In the general systems-oriented understanding of Islamic ethico-economics, the ethical and economic meaning of abolition of interest are fused together. Let us then understand why abolition of interest becomes mandatory in such a framework of analysis.

The presence of interest in financial and economic activities implies dissociation between two major sectors of the economy. These are the monetary sector and the productive sector. Money is treated as a commodity of the monetary sector. Its price is made to capitalize risk that indeed can be avoided in alternative ways. Risk is assumed to exist ex-ante because the holder of money can subjectively assign risk and then impute it in his price for money, which is the rate of interest. Hence assuming ex-ante risk to exist generates earnings to the money lender. Alternatively however, risk could have been avoided or reduced by resource mobilization, instead of holding it in the bank or in speculative outlets. Money is not saved but mobilized in the real economic sectors to earn real economic returns. The real sector then pays off the returns on loanable funds.

In the macroeconomy as well, the policy to stabilize inflation, to slow down the excess demand for investment resources, and attract world savings into the national economy, reflect the government’s approach to make the monetary sector act independently of the real sector. In these cases the rate of interest is used as a basic monetary instrument. Consequently, the potentiality for reducing macroeconomic instability and dis-equilibrium otherwise by generating real sectoral linkage with money capital flows, is ignored. The end result is that the monetary sector gains over the real sector through the profits earned on loanable funds. The two sectors are thus once again de-linked through such a competition.

Knowing that the rich gain from the money markets in terms of earnings of interest and the poor gains by real sectoral activity, the above independence between the two sectors can be seen to adversely affect the poor. The ethical acquisition of wealth and the social order are thereby made increasingly unjust. Indeed, in recent times the feverish run for interest-bearing speculative funds in the global financial markets have left the national economies in disorder and their poor adversely affected on all fronts.

In terms of the intertemporal accumulative nature of savings seen as withdrawal of spending from potential productive ventures, this causes those who hold money to take advantage by earning interest on such savings. Savings thus become an incentive that is causally related with interest rates. The separation of savings as an economic activity from the activity of spending causes competition between the money market and the product market. Savings draw resources into the monetary sector. Resources thereby, leave the real sector when interest rate prevails as an incentive to savings against spending. Savings thus once again cause the economy to be de-linked between these competing sectors and activities. Indeed the neutrality of monetary policy on full-employment income is the result of an economy in which the real sector has become unyielding. This leaves the monetary sector to be unyielding on productivity.

The outlook of the Islamic economy is to make spending as the basis of resource mobilization. Thus when households put monies in Islamic banks, such funds are to be mobilized by the banks in order to earn returns from permissible productive investments. The return on such resources is the return on the real sectoral venture. There is no return of money on money. Money is simply an ex-post medium for servicing the real sectoral demand for permissible and productive activities. Risk is shared between agents and sectors in terms of the magnitude of the real sectoral rates of return. The concept of saving as withdrawal from spending is replaced by the idea of resource mobilization into permissible and productive investments through Islamic banks. Banks must rapidly turn money capital into real capital through entrepreneurial activities (Choudhury 1997)..

Contrary to the resource mobilization mechanism, interest bearing financing window determines a subjectively advance estimate for uncapitalized risk to the savers or the borrower in the hope that they can secure a guaranteed return on savings. This price, which is the rate of interest, is a marginal substitution rate on real yield. Intertemporal discounting then ensues in the subjective capitalization method for evaluating risky ventures in an interest-based financial system. Discount rates used are neither objective nor risk-free. The very existence of uncapitalized risk and its pricing by the rate of interest over time implies a permanent constriction of the flow of resources into the real sector. This kills entrepreneurial spirit. An economy cannot be sustained along a development path in such uncertain and socially costly conditions.

Profit-sharing Under Economic Cooperation

In order to replace interest transactions, the Islamic economy provides incentives to mobilize resources into permissible and productive joint ventures. Through such participation and extension of cooperative agents and projects across the economy, an effective diversification of production, investments and risk is attainable. Thus risk pricing by means of the rate of interest is replaced by expected rates of returns. The real sectoral returns are shared ex-post by the participants in cooperative ventures. The marginalizing competition between the monetary sector and the real sector, between owners of capital and labour, and thus between the rich and poor caused by the prevalence of interest, are all replaced by participatory ventures. In this way, resource mobilization through profit-sharing is causally related with complementarity among economic activities and agents.

In the production sector, complementarity between factors of production (capital and labour) is brought about by the choice of equally capital-labour augmenting technological change and by extensive participatory ventures economy-wide. Now both entitlement and empowerment, which are consequences of participatory decision-making and cooperative sharing of risk and returns, are realized. In the macroeconomy, the monetary sector where the financial capitalists prevail, and the productive sector where labour prevails, are interconnected by means of complementarity between these sectors and agents.

In Islamic profit-sharing under economic cooperation, because of the exclusive liability of capital in joint ventures, capital owners assume all financial costs in the case of losses and business dissolution. On the other hand, labour can opt to delay taking dividends and/or defer portions of wage payments in such participatory enterprises. There are however, innovative methods that can be established to circumvent the problem of risk and costs in enterprises. One such option is a development fund generated with accruals from wages and profits for use during times of exigency. Such pooled funds can also be treated as a wage and corporate insurance. The range of enterprise linkages and activities is thus broadened and diversified. The result is risk and product diversification.

The concept of sharing time as an investment resource by labour for a deferred return can be considered as another innovative means of capitalizing shareholding between capital and labour in an enterprise and among many enterprises for that matter. All of these possibilities affirm the principle of complementarity among factors, resources, goods, ventures and sectors through a production relationship that is contrary to the de-linking nature of interest-based financing of enterprise (Vanek 1977).

Variable contracts in profit-sharing between capital and labour is yet another mode that can increasing the entitlement of labour and generate more resource flows in the economy through heightened participation and wealth mobilization. In a purely participatory Islamic economy such kinds of variable financial contracts would also be linked with choices on options and links by way of indexes of financial holding in the emerging resources and investment funds.

Joint Ventures and Equity Participation

Owners of capital can cooperate with each other in extending their investment resources and also in diversifying risk and ventures by outlays over an expanding economic space. Risk and product diversification so caused by extension of pooled resources also removes the relevance of interest pricing of risk, in which case money and product markets remain detached and compete for independent gains. Interest rates are thus effectively replaced by actual ex-post sharing of returns on ventures with realized and fully evaluated risk.

Although Islamic economists have treated profit-sharing and equity participation in separate ways, there is neither reason for nor efficacy in doing so. Since capital and labour are complementary in the Islamic economy and equity participation is another cooperative mechanism among capitalists, therefore, increasing numbers of enterprise and labour are realized and interconnected by a mix between profit-sharing and equity-participation, both taken up as participatory entrepreneurial activities.

Consequently, in the case of equity-participation a contractual undertaking between owners of capital is also a contract between capital and labour and thus between and among all. This means a systemic extension of the resource mobilization process across the Islamic economy. Such an extensive participation must be upheld if interest is to be eliminated. Hence the principle of complementarity relates money capital to productive ventures. In the same way, joint ventures and equity-participation must serve the wider empowering and entitlement generating effects of labour and capital within an entrepreneurial framework with increasing decision-making possibilities.

In a systemic view of the Islamic economy there is no need to particularly differentiate profit-sharing from equity-financing, except to identify the sources of funds and the contractual claims on dividends by the participants. But in the general systems framework the causal interrelationships among resource flows from one to another do not make a difference in terms of specificity of the sources of funds. Registering the specificity of sources of such funds is not of any economic significance; it is simply a matter for legal and accounting viablity of contracts.

In such a general systems framework it is interesting to examine the role that such resource flows can play in establishing a dynamic equilibrium system with endogenous ethics in it. Ethics is represented in Islamic systemic world-systems by their intrinsic presence in all entities as knowledge flows derived epistemologically. Thus when universal complementarity prevails across diversity in the Islamic economy, unity in this sense is to be taken as a sign of unification of knowledge of the various agencies, sectors, variables and their relations. Such a complementary process is realized through participation. This is realized through the above two financial instruments. It is also reflected in terms of engineering methods that enable such evolutionary systems of interactions and integration to be analytically studied (Shakun 1988).

The Institution of Charity

Charity in Islam has a wide meaning. Zakah as charity is a mandatory take on wealth for specific purposes of meeting a wide range of social responsibilities as explained in the Qur’an (Chapter 2, verse 177). One of these social mandates is poverty alleviation. Here zakah guarantees basic needs to the needy and establishes social as well as distributive justice. The use of zakah can be seen as an example of the deontological (rights and duties) aspect of ethical market transformation. ‘Deontological consequentialism’ of markets is a social problem that we showed has occupied Sen’s interest in his theory of social well-being and agency.

Sadaqah is another form of charity. It is exclusively voluntary and meant to be spent on the destitute. There is however, no reason why sadaqah cannot be organized on the same format as zakah. This inference follows from a verse of the Qur’an that identifies the two with similar modes of expenditure. See Qur’an, Chapter 2, verses 177 and 215. Verse 177 is specific on zakah, whereas verse 215 mentions charity broadly, and yet the organization of expenditure is the same. Consequently, the implication of overall organization of zakah can be generalized for all forms of charity, including voluntary sadaqah.

The meaning of charity in Islam goes beyond zakah and sadaqah. Endowing public property for the general benefit of the needy community (waqf), building an environmental enclave (hima) for ecological balance, and in general goods and exchanges in society individually and collectively, are forms of charity. Thus charity becomes a widely accepted resource flow in the grants economy with the elements of both a monetary as well as a social asset and returns associated with it. In this sense, charity induces linkages between groups and socioeconomic possibilities. The goal is to mobilize charity for attaining social justice, equality and distributive justice, and productive transformation of the recipients of charity and activities in and by the endowed assets.

Charity in Islam is not meant to generate free-ridership. That is, it is not considered as an outlay without a useful return that favourable influences socioeconomic transformation. Consequently, charity is to be understood as a medium for a socially productive mobilization of excess resources from the wealthy to the needy for enabling both of these groups to interact, integrate and prosper in the social economy. The wealthy promotes such integration by participating in the social needs through spending his excess resources. The needy participates by utilizing resources in productive activities towards transforming his state of poverty. This necessitates complementarity among the whole gamut of inter-sectoral linkages, economy-wide participation, as we explained earlier. The mutual interest between the rich and poor in this act of sharing in the charitable enterprise is the prospect of attaining social stability and a grants economy that delivers social goods as returns to all.

In such a milieu of productive transformation comes about the importance of resource flows through the participatory economic instruments of profit-sharing and equity-participation. The increasing presence of such instruments in the face of the inverse relationship between such participatory economic instruments and interest rate, phases out the interest rate regime. A general systems treatment of charity as resource augmentation enhances the productive capacity of the poor along with establishing enterprises for them. Such an approach can manage to integrate the poor in the hub of mainstream economic activities, in trade and development, and in entitlement and empowerment through participatory decision-making, as human resource advances.

There are many innovative ways in which charitable resources including zakah and sadaqah can be mobilized for the above kind of productive and ameliorative transformation. One example is the setting up of a development fund that will encourage informal labour force activity including human resource development in the case when below subsistence wages cause discouragement effects and low calorific intake by the poor (Choudhury & Hasan 1998). In such a case, wage exploitation of low-wage earners by employers can be avoided while productive activity continues on to be enhanced. Such a development fund can be set up by giving an international perspective to Islamic charity as a source of resource flows from the wealthy to the needy groups in the Islamic world. The total mobilization of emerging productivity of the poor along with the rich through participatory ventures where zakah funds can be mobilized enhances the total wealth formation through productive mobilization of resources. This in turn increases the total national output, resources and wealth.

Indeed, zakah is a claim on wealth, not simply on cash balances and discretionary income. In the Islamic economy, wealth is formed through capital mobilization by means of a productive regeneration of returns in appropriate channels. Such a conception of production of wealth when combined with the equitable distribution of wealth, which depends upon charity, most importantly zakah, signifies a linkage between zakah and the ethical production and distribution of wealth. Zakah cannot therefore, cause a disincentive effect on the productive transformation of resources into wealth.

Such a way of generating and distributing wealth is unlike the case of capital accumulation by means of savings using the instrument of interest rate. In this case, the presence of interest rate harms productive activity by limiting the supply of loanable funds and inflating the cost of investment. The rate of return is then negatively affected by interest rate. Productive assets and monetary assets remain competing and negatively affected in the presence of interest rates as the price of money capital.

Avoidance of Wasteful Use of Resources

The attainment of all of the above-mentioned Shari’ah instruments is based on the avoidance of wasteful use of resources that cause leakages in the socioeconomic system and hence scarcity. Scarcity then returns back to neo-classical resource allocation and this re-introduces marginalism and its associated postulate of methodological individualism as we found in the case of the classical and neo-classical schools. Only with waste reduced in the economy can diversity be realized and maintained. Thereby, cost and risk diversification can be attained. The result is the possibility of attaining complementarity among possibilities of the real economy in terms of its goods, services, agents and variables and their various relations.

The avoidance of waste is extended from the demand side to the supply side (production side). On the demand side the promotion of dynamic basic needs of life will necessitate a human ecological balance to be maintained. This will preserve price stability of the Islamic economy and provide plenty for the sustenance of life. Such preconditions result in the nature of near normal profit levels. On the production side the response to the interactive process of knowledge sharing between consumers and producers will result in the appropriate kinds of dynamic basic needs to be produced. Consequently, the choice of production menu based on complementarity between buyers and sellers and between goods produced is an organizational concept of biodiversity of production. It is an important part of sustainability emanating from the production side. Thus in the general systems perspective of the Islamic economy interactions between the two sides through interchange of knowledge flows preserve the ecological balance. Sustainability in such a concept is causally related to the avoidance of waste.

Systemic Linkages among Islamic Financial and Economic Instruments

We have pointed out in our discussions on the financial and economic instruments that there are clear and direct interrelationships among them in the light of the unique goal of attaining social justice, creating productive realization of wealth and its equitable distribution in the Islamic economy. Here is where ethical values converge with economic instruments according to Shari’ah. The instruments are found to be causally interrelated by an extensive inter-flow of resources from one source to another. This enhances the general systems perspective of the Islamic economy. Thus, ethical endogeneity is systemically realized by cause and effect through the principle of universal complementarity across diversities. Such a process is in turn reinforced by risk and product diversification and inter-sectoral linkages.

Interest rate, which is found to de-link inter-sectoral activities for the common good is replaced by the rate of return in complementary productive sectors. The value of money responds to this productive return. The economic and financial instruments of the Islamic economy thus realize the principle of universal complementarity, so centrally needed to unify the economy in its systemic and ethically endogenous sense of knowledge induction across agencies, systems, variables and their relations.

Conclusion

We have shown in this paper that the greatest revolution in economic theory to come will be found in discovering the epistemological methodology of integrating ethics with economic activities in an endogenous way. Mainstream economics despite giving a high place to ethics in economic reasoning could not discover this methodology. The reason for this debility, as discerned in this paper, is the absence of the premise of unity of knowledge in its ontological and epistemological sense in economic theory and other socio-scientific systems. Rationalism as against the wholeness of an accepted text of laws and conduct of life, causes the human process to drift into an infinite regress of randomness.

Ethical endogeneity in economics is shown to require its systemic treatment in a vastly interactive, integrative and evolutionary knowledge-induced process. We derived this as the shuratic process. In this, rules and reasoning are developed by a regimented design of social contract under Shari’ah and not by rationalism. Knowledge is then used as the invincible and permanent vehicle to carry ethical values to preferences and from preferences to social transformation. The emerging general systems of unifying forms premised on the Divine Laws impart the essence of unity of knowledge in its conceptual and revealed form. This led to our derivation of the principle of universal complementarity in the midst of diversity. Such is a derivation from the Qur’anic delineation of the essential pairedness of the universe and all its entities. The Qur’an presents the world view of interactive world-systems in terms of its general systems ecological model of interconnectedness, justice (balance), purpose, certainty and felicity.

Unity of knowledge and hence unity within ‘de-knowledge’ exists both in the plane of truth and falsehood, respectively. The difference between these categories however, is that truth integrates within its own world-systems by means of unity realized through interactions. This is the idea of integration in this paper. From interactions leading to integration emerge creative evolution. On the other hand, falsehood unifies in its own category by maintaining a pattern of increasing plurality and alienation within itself. In the case of unity of knowledge for the truth category, the world is increasingly transformed from a randomly uncertain one into a certain one. This is the essential function of creative evolution, which too is the Qur’anic tenet of creative patterns, search and discovery, all associated with knowledge flows and their manifestation of the divine signs embodying world-systems.

Finally, on emphasizing the essentially systemic and unified view of knowledge emanating from Divine Unity and being externalized through the Divine Laws, we have noted the vastly interactive, integrative and evolutionary nature of the abiding methodology. Such a methodology, and thereby, the treatment of general ethico-economic systems in the endogenous sense, have not been studied in contemporary Islamic economics. In its absence, the structure of Islamic economics has remained by and large a mainstream discipline.

We have seen that the mainstream economic methodology does not warrant an endogenous treatment of ethics in economics. By the same token, the mainstream economic methodology so far used by Islamic economists has not enabled a systemic treatment of knowledge induced world-systems, within which economic problems can be charted. The latter emerging field has led to a departure as a sign of maturity within the discipline of Islamic economics. It is today being termed as the field of Islamic Political Economy.