Contributions to Economic Analysis: Volume 291

This series consists of a number of hitherto unpublished studies, which are introduced by the editor in the belief that they represent fresh contributions to economic science.

I am thankful to many colleagues and institutions for their assistance in bringing up this important work to its fruition for publication. As a most comprehensive work on the epistemological foundations of a theory of Islamic economics and finance, this work required a lot of initiative to get it up to the publication level. It was very difficult to bring the entire subject matter and contents of this book to a fair degree of understanding among colleagues. The impediment in this direction was the prevalent subservience of Islamic scholarship to mainstream economic theory that has its own epistemological leaning, which has already received serious criticism from the highest levels of thought. But these critical examinations along with the Islamic epistemological scholarship have not seeped into intellection. Islamic economics and finance as a subject area leaned and slumbered in the bosom of a disappearing linage of neoliberal paradigm. It never had the chance to mature and become an original contributor in the absence of intellectual consciousness that must establish the domain of high thought. The present book is a criticism of that uncritical and epistemologically barren intellection in Islamic economics and finance. While this book takes a bold and original approach to the epistemological foundations of Islamic economics and finance, conceptually, analytically, and empirically, it seriously rejects the prevalent scholarship on intellectual grounds.

This advanced study in philosophy and moral theology brings to bear the universal principles of all the world religions on the socio-politico-economics of globalization. It contrasts the bottom-up paradigm of capitalism based on the autonomous individual as the ultimate source of truth and justice with the top-down paradigm of higher truth embodied in a transcendent source, known in Islam as Tawhid.

Universality and uniqueness as precepts of the socio-scientific worldview have always been the quest of the highest body of intellectual inquiry. This has been the quest by both the Islamic and Occidental scholars for a long time now. In this postmodern era of epistemological criticism the search for the ultimate explanation of reality has intensified (Ruggie, 2002).

Oneness is the prime attribute of God. Divine oneness is the singular moral foundation of “everything” invoking socio-scientific intellection in the Islamic worldview. In this ontological sense, this concept of conscious oneness means that the ultimate and indivisible absoluteness and completeness of creatorship, knowledge, will and power over all things, rest with God alone.¹ Because God's oneness belongs to the domain of purity (Ikhlas), removed from the material and cognized worlds, it marks the topological domain of the fullness and purity of the knowledge stock. It exogenously by itself creates, governs, and acts upon the created universes of all kinds, abstract, and evident. By itself, the precept of oneness of God is not causally affected by anything. It creates all but is never created of itself, or by any other.²

We commence answering the above questions first with an extension of the definition of Economy given by Gerard Debreu (1959). Choudhury (1999a) has extended Debreu's formulation by introducing the learning parameter of unity of knowledge. The ethically induced economy in the light of conscious oneness is a complex relational universe of its micro-parts. These comprise prices, quantities, incomes, resources, preferences and production menus, and technological choices. These are studied in relation to multimarkets and their agents represented by vector-variables of each of the above-mentioned categories. All of these categories of the representing variables are mutually interactive according to the interactive, integrative, and evolutionary (IIE)-learning processes (explained earlier) by the medium of knowledge-flows that emanate from the episteme of conscious oneness.¹

The generality of the universe is “everything.” In this regard, the Qur'an declares abundantly on the ultimate and perfect domain of the divine law in creation. This also means the profundity of the divine law in explaining and applying to all things in the knowledge–time–space dimensions of the conscious universe. Such observations or insights that span the complete universe comprise the Signs of Allah (ayath Allah).¹

In this book we consider the foundation of ethics to be the moral law. Contrarily, in mainstream terminology ethics is defined as values manifesting human behavior in congruence with certain civil conduct that are commonly agreed upon by society at large (Spencer, 1978). In reference to the social preference basis of ethics and morality we can adopt formalization by using two different approaches. One approach is to consider linear aggregation of preferences. The other is to treat morality and ethics within complex aggregation types.¹

To establish these definitions we revisit expression (5.3) of Chapter 5. Since this expression describes a phenomenological model of knowledge transmission from its epistemic origin to the world-system by learning processes, therefore, we first summarize the arguments on what can be the nature of (Ω,S) in this expression. Our arguments were centered on the contrasting nature of moral absolutism and the ethical meaning so derived. This axiomatic core of the arguments stood up against moral relativism of both the rationalist and religious types on which is premised a different meaning of ethics.

In considering the role of ethics in Islamic economic and finance theory, it is necessary to understand the nature of ethics as human behavior derived from the foundation of Tawhid (oneness of Allah=unity of the divine law) through the transmission medium of the Sunnah (guidance of the Prophet Muhammad). These are together taken up as the basis of spiritual guidance in Islam – hudal il-mutaqqin (Qur'an, 2:2). This foundation of Islamic epistemology in concert with the medium of epistemological discourse among the learned participants establishes the idea of a System and its embedded circular causation relations in view of the ethics in the Qur'anic world-system. It is also necessary to understand how ethics, as so derived from the epistemological roots and processed through the ontological investigation of values and directions for rule setting pertaining to given issues at hand, establish the premise of the shari'ah along with its ijtihadi (foundational Islamic investigation for rule setting) extensions.

The arguments of this chapter that are set up against the prevailing Islamic economic and finance intellection and practice arise from the economic and methodological premises on behavior, markets, and institutional structure that together influence asset valuation. All these are bonded together to explain how methodology defines the domain of financial engineering in mainstream and Islamic perspectives. Mainstream financial engineering as a study of methods that stand upon the assumptions of behavior, markets, and institutions of the neo-classical vintage is critically examined. This is contrasted with the Islamic perspectives of the same issues that lay out an altogether different methodological worldview. Different forms of asset-valuation models emerge in these two cases. The Islamic premise of behavior, markets, and institutions is utilized against the backdrop of its most fundamental epistemology.

The raw data are tabulated as given in Table 9.1.

Negative ηi,j(θ)-values denote marginal rates of substitution except when they denote the replacement of “bads.” There cannot be substitution between “goods” in an endogenously knowledge-induced Islamic socioeconomic order. Likewise, the shari'ah avoidance of “bads” does not legitimate the acceptance of a quantity of one bad by another bad, negating marginal rate of substitution in such a case and in the case of goods related with goods. Thus, the shari'ah principle is that a good cannot be traded off with a bad; a bad cannot be traded off with a bad; and a good cannot be traded off with a good.

With a population of over 150¹ million, Bangladesh provides a large consumer market for potential industries. Moreover, it holds one of the lowest wage structures in the world. The comparative advantage of Bangladesh lies primarily in its agro-processing industries. But besides agriculture, the rural-based microenterprise (MEs) sector in Bangladesh is a potentially lucrative field of investment (IPPF, 2001). In spite of its major contributions toward economic development, the rural-based microentrepreneurs in Bangladesh suffer from lack in working capital, institutional credit facilities, and poor management. There are many formal and informal financing organizations that are functioning in the money market of Bangladesh. Formal financing institutions like government and privately owned commercial banks normally give loans to large- and medium-scale industries (Alam, 2009). Cooperative banks in the country, although giving loans to the rural-based microenterprises, confine their credit giving activities mainly to the members of the bank (BIDS, 1981, 1988, 1989, 1990). One of the specialized and well-known microcredit giving organizations in Bangladesh called “Grameen Bank” (Yunus, 1993; Nabi, 1990) also gives microcredit to the rural-based microentrepreneurs, especially to the rural poor women. Besides many NGOs, moneylenders in rural Bangladesh are also an important source of lending funds to the rural-based microentrepreneurs.

The economic, financial, social, and scientific reasoning in Occidentalism is a profound example of the reasoning dichotomy caused by the problem of heteronomy. The duality consequences of economic rationality and rationalism between the spiritual and material domains remain entrenched in all the sciences (Dampier, 1961).

Davos World Economic Forum (2008a–d) sparked off a number of critical points on global economic remodeling. They bring forth social and economic facts that are to be addressed in a framework quite different from the conventional policy-theoretic reasoning of age-old socioeconomics. The prevalent reasoning continues on the traditional paradigm of growth and sharing, but in an unequal world of power, politics, and self-interest. In the present status quo, resources do not flow between the top and bottom, the industrialized and the developing countries, the rich and the poor, except by means of handouts and relief (Hans Singer and Ansari, 1988).

The basis of the present financial crisis, which is bound to continue inflicting its venom because of structural problems of society, economy, finance, and institutions, is the insatiable preferences of households and investors that fuel excessiveness in the real estate market. Then there is the contagion that this kind of preference has on the economy and the foreboding uncertain market expectations everywhere. Finally, the excessiveness is allowed to survive and proceed on with unrelenting animal spirit by weak government polices, outmoded understanding of the economic and financial world-system, being unable to simulate the otherwise complex system by a spent-out methodology.

For long now the economics profession has boasted of Economics as the Queen of the Social Sciences. That was the era when Economics matured under the shade of a classical notion of the physical universe, whose properties it imported into rational choice. Economics emulated the mathematical methods of optimization and equilibrium behavior and overarched these methods between microeconomics and macroeconomics in the areas of economic growth, public choice theory, rational expectations, constitutional economics, and many others. Each of these branches of economics remained entrenched in rational choice behavior exported from the microlevel to institutional and collective norms. In this way, a unique and universal premise of self-interest, individualism and independence, and completeness of rational choice assumptions was extended to the institutional level. Thus, the rational choice behavior of individualism became the principle of methodological individualism of liberal institutionalism.

Setting the field of economics as the study of value in exchange, Blaug (1968a, 1968b, p. 6) wrote:The problem that gave rise to economics in the first place, the “mystery” that fascinated Adam Smith as much as it does a modern economist, is that of market exchange: there is a sense of order in the economic universe, and this order is not imposed from above but is somehow the outcome of the exchange transactions between individuals, each seeking to maximize his own gain. The history of economic thought, therefore, is nothing but the history of our efforts to understand the workings of an economy based on market exchange.