Islamic Economics as Mesoscience: A New Paradigm of Knowledge [1 ed.] 9811560536, 9789811560538

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Masudul Alam Choudhury

Islamic Economics as Mesoscience A New Paradigm of Knowledge

Islamic Economics as Mesoscience

Masudul Alam Choudhury

Islamic Economics as Mesoscience A New Paradigm of Knowledge

123

Masudul Alam Choudhury Postgraduate Program in Islamic Economics & Finance Trisakti University Jakarta, Indonesia Department of Social Justice Education, Ontario Institute for Studies in Education University of Toronto Toronto, Canada

ISBN 978-981-15-6053-8 ISBN 978-981-15-6054-5 https://doi.org/10.1007/978-981-15-6054-5

(eBook)

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2020 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Preface

Science bereft of sound epistemological foundation is muddle-headed. The meta-science of ‘everything’ deals with the quest for a unique and universal theory that underlies every branch of the socio-scientific world-system in generality and its particulars. The categorization of application of the uniquely generalized theory is only in terms of diversity of issues and problems in different areas of investigation. While mainstream socio-scientific thought is embedded in its humanly differentiated multilateral human concocted domains of understanding, this causes dichotomy between the a priori and a posteriori segments of deductive reasoning separated from inductive reasoning. Therefore, if we consider Kant’s ethical adage: “So act as to treat humanity, whether in thy own person or in that of any other, in every case as an end withal, never as means only,”1 there appears a dichotomy between ethics and efficiency, self and other, science and society and the like. Yet ethical holism demands complementarities to exist between these two ends to be scientifically and socially acceptable. In economic science of growth, efficiency, development, and ethics one finds trade-off between the two goals despite the fact that no reasonable side would like to part with the ethical obligation to establish a caring society. The problem is not of many who think rightfully. The problem lies in the methodology of an optimal, steady-state, and competition framework that must thereby premise its formal and applied concepts on the axiom of the scarcity of resources. This assumption is at once also coterminous with the neoclassical principle of opportunity cost and marginal rate of substitution in optimal resource allocation. It is the core of rational choice theory. It is bereft of a permanent evolutionary learning framework of resource augmentation that defies the axiom of the scarcity of resources as projected in the measures of competition for optimal allocation of scarce resources with steady-state equilibrium. The limitation of mainstream economics transcends this kind of microeconomic perspective to macroeconomics. Thus, the axiom of rational choice entrapped in the assumption of the scarcity of resources, and thereby 1

Kant, I. (1909). Kant’s Critique of Practical Reason and Other Works on the Theory of Ethics, in Abbot, T.K. ed. Pg. 47. Longmans, London. 1909), p. 47.

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competition and marginalist hypothesis, remains untenable in embodying the ethical and economic perspectives of a cogent theory of ethico-economics wherein ethics and economics exist as analytical and applied realities. This kind of endogenous treatment of ethics and economics is grounded on a new methodological premise. The quest in the methodological direction leads into the foundation of a theory of meso-economics as mesoscience. The much needed integrated study of science and society, ethics and economics have failed to be grounded on any such epistemological premise with an integrated theoretical worldview and its applied method. Thereby, the belief in and the behavioral properties of the coterminous fields of ethics and economics in both the microeconomic and the macroeconomic fields remain empty in all of socio-scientific inquiry. In the existing socio-scientific inquiry, ethics is seen to be exogenously implanted in economics and science—not endogenously embedded in every discipline.As for example, econometric models currently available, ever since Keynes desired to make economics a handmaiden of ethics along the ideals presented in Principia Ethica by G.E. Moore (1903),2 never could implicate the ethical consequences in economic and social theory and consequential analytical modeling. Keynes’ epistemology relating to macroeconomic theory thereby had to yield to rationality behavioral background (O’Donnell, 1989).3 Economics as a behavioral science altogether succumbed to the optimal calculus of economic rationality and to ethical rationalism. Thereby, science as a whole and economics in it could not acquire any functional ethical representation. Ethics remained exogenous to what the formal models quantified and implied. The general or rather the generalized evolutionary learning ethico-economic system, the formalism with which this work deals with, has no possibility except by exogenous ethical effect in any of the models improvised in the literature. The embedding of endogenous role of ethical parameterization in the generalized abstracto-empirical model in our work is a contribution that extends the rationality constricted models of general equilibrium—steady state of evolutionary economics (Nelson & Winter, 1982)4– in the existing literature of optimal resource allocation theory of pure exchange (Naimzada & Pireddu, 2018).5 See also Bisin & Verdier (2001)6 on cultural perturbations in evolutionary general equilibrium models.

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Moore, G. E. (1903). Principia Ethica, Cambridge University Press, Cambridge, England. O’Donnell, R. M. (1989). “Some philosophical background”, in his Keynes: Philosophy, Economics & Politics, pp. 11–28, Macmillan, London, England. 4 Nelson, R. R. and S. G. Winter (1982). An Evolutionary Theory of Economic Change, the Belknap Press of the Harvard University Press, Cambridge, MA, USA. 5 Naimzada, A. & Pireddu, M. (2018). “Complex dynamics in an evolutionary general equilibrium model”. Discrete Dynamics in Nature and Society, 13 pages. DOI: https://doi.org/10.1155/2018/ 8471624. 6 Bisin, A. and Verdier, T. (2001). “The economics of cultural transmission and the dynamics of preferences. Journal of Economic Theory, 97:2, pp. 298–319. 3

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Now to search for the ultimate formalism of ethical endogeneity in socio-scientific thought and its epistemic rendering a field of the highest inquiry ought to be discovered no matter where it can be found: Pursue truth as if you did not have it. Knowledge and realism in abstraction and phenomenological evidence make such discovery possible. Religion, abstraction, and abstruse applications in the world of science can then be spearheaded by abstract mathematical logic. Economics is a form of philosophy concerning the interrelationship between the exchange reality of human concern triggered by its behavioral attributes (Simon, 1957)7 and by the intricate logic of interdisciplinarity this quest embodies. Inclusive in such a knowledge-induced search for the vastly possible is the inevitable role of God as the great abstraction relating to the realism of socio-scientific world-system. On this matter, the great Indian mathematician, Srinivasa Ramanujan (quoted by Kanigel, 2016, pp. 7 of Prologue)8 stated: “An equation for me has no meaning,” he once said, “unless it expresses a thought of God.”On the ultimate reality of inducing God and Truth uniquely and universally in the worldview of distinctive learning, the Qur’an (part of 24:35) declares in respect of the monotheistic oneness as the pedestal of knowledge through learning in everything: “Allah is the light of the heavens and the earth”. The saying of the Prophet Muhammadon, the matter of the ultimate scope and objectivity of knowledge in Oneness of God and his Law of Unity referred to as Tawhid in reference to both theology (abstraction) and the phenomenology of the world-system is this (Hadith Al-Bukhari, author’s bracketed interjection): “My servant approaches Me with nothing more beloved to Me than what I have made obligatory upon him (learning in the knowledge of monotheistic Oneness), and My servant keeps drawing nearer to Me with voluntary works until I love him (unison between God self, and the universe). And when I love him, I am his hearing with which he hears, his sight with which he sees, his hand with which he seizes, and his foot with which he walks (explained phenomenology). If he asks Me, I will surely give him, and if he seeks refuge in Me, I will surely protect him (the ultimate objective of knowledge, self and the world).” The behavioral dimension of the new emergent theory of ethico-economics expressed by the meso-economic method of a new theory of knowledge-induced integration of preferences of the microeconomic world into disaggregate macroeconomic theory to make them a meso-one becomes equally sensitive to endogenous ethical/moral methodology and its parameterization. This challenge and its quest and discovery are indeed the highest level of an intellectual feat of all times. That is indeed the direction of this work on the ethico-economic, meso-economics of ethical phenomenology in an alternative representation of analytics (econometrics and wellbeing) that we will refer to as the wellbeing objective criterion. The Islamic methodological worldview of wellbeing arising from the primal ontology of monotheistic oneness is invoked because of its uniqueness and universality attributes in respect of the generality and particulars of ‘everything’ 7

Simon, H. (1957). Models of Man. John Wiley & Sons, New York, NY. Kanigel, Robert (2016). The Man Who Knew Infinity: a Life of the Genius Ramanujan. Simon and Schuster. pp. 30–33. 8

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(Barrow, 1991).9 The emergent derivation of the law of Oneness in relation to the details of issues and problems of the world-system in the light of relational unity of knowledge presented in the Qur’an (36:36)10 combines the deductive abstraction with the phenomenological inductive recursively in continuums of knowledge, space, and time dimensions. The derived methodological worldview formalized and investigated in the mesoscientific objective of the wellbeing criterion thus earns its socio-scientific candidacy. The Islamic primal ontological methodology of monotheistic oneness (Tawhid as the Law) in its belief and functional attributes offers this unique and universal worldview to ‘everything.’ Yet it is not the contribution on which the Muslims and their disciplines have rested. Consequently, like the methodological failure of Kantian a priori and a posteriori dichotomy in knowing the unified reality of truth by unity of knowledge and the final episteme, and which renders the field of development studies to attain the ethical integration in a unified endogenous relational oneness, so also the so-called ‘Islamic’ disciplines like economics, finance, science, and society have failed utterly by their ontological and epistemological emptiness. The most profound ontological primacy of monotheistic oneness (Tawhid as the Qur’anic Law) has been replaced by the dysfunctional nature of shari’ah as humanly concocted and uttered objective and purpose by the Muslim sects. Indeed, the equivalence of shari’ah to Tawhid is only in terms of the latter. Thereby, shari’ah is simply the ‘way’ from and towards knowing Tawhid in the enlightening profundity of unity of knowledge as the law relating to world-system. But if this is the logical and clear evidential conclusion from the Qur’an, then not shari’ah but Tawhid alone as the belief, Law, application, and sustainability in the most methodological way becomes the sole objective of the true Islamic methodological worldview across holism and possibilities. Shari’ah if anything, though doubtfully, is therefore a partial examination of the world-system of juristic innovations by various Muslim sects apart from the accepted common rules laid down in the Qur’an (36:36). This law is of monotheistic unity of knowledge as relational phenomena in and across ‘everything.’ The so-called ‘Islamic’ economics and the intellectual legacy have failed utterly in the quest for the true Qur’anic methodological worldview. This sliding and decadence in Muslim scholarship have lasted for a long time now and continues on by its human-concocted design of shar’iah following sects and remaining a failed isolation of a separated world-system. Contrarily, Tawhid as Qur’anic law is of ‘everything’ (Choudhury, 2020).11 The Qur’an declares in this regard; see Qur’an (24:35). The so-called ‘Islamic’ methodology claiming shari’ah and in no substantiation by its Qur’anic relationship with Tawhid as the law of monotheistic 9

Barrow, J.D. (1991).Theories of Everything, the Quest for Ultimate Explanation, Oxford University Press, Oxford, England. 10 Qur’an (36:36): “Exalted is He who created all pairs - from what the earth grows and from themselves and from that which they do not know”. 11 Choudhury, M. A. (2020). Meta-Science of Tawhid, A Theory of Oneness. New Palgrave, New York, NY.

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unity of knowledge by organic and symbiotic interrelations between entities (positive and negative) is no different from the Kantian dysfunction of organic unity between a priori and a posteriori (i.e. deductive and inductive, noumenon and phenomenon, pure reasoning and practical reasoning, etc.). This epistemic failure is maintained in recursive continuity of being and becoming. All such methodological implications of ethical endogeneity and its imminence in the real problem solving of phenomenological effects are embedded in the objective criterion of wellbeing (maslaha in Arabic terminology). The wellbeing function expresses the mesoscientific analytics of micro-foundation of ethical unity of endogenous by inter-variable causality in a large system of interactive, integrative, and learning relations. The methodological worldview of monotheistic unity of knowledge that enables ethical endogeneity, and thereby inter-variable causal recursive nature of complementary relations (positive or negative) in the wellbeing function, and makes the resulting methodical application good for ‘everything’ are altogether unknown in so-called ‘Islamic’ economics, finance, social, and scientific thought. The resulting state of stagnation of ‘Islamic’ thought persisted for ages now. Even the use of the term maqasid as-shari’ah (purpose and objective of shari’ah) is benign of any substantive treatment of Tawhid as the Law and its imminent methodology of the unity of knowledge in all details of the world-system. The conceptual and applied properties of the underlying dynamics of the Tawhidi methodological worldview and its wellbeing criterion with its system of inter-variable causal relations are presented throughout this work. It is presented here to initiate the underlying methodology extending from Primal Ontology to Epistemology to Phenomenology in continuums of sustainability by evolutionary learning. The Tawhidi methodology built upon the theory of causality by the unity of knowledge as endogenous induction of endogenous inter-variable relations is a distinctive contribution of this work. It rescues the Islamic methodological worldview from the intricacies that the subject of causality was rendered by the Islamic theologians. Yet no creative avail of abstracto-empirical nature could be realized (Ozalp, 2016, pp 245–260).12 In conclusion to this preface of our work, we claim to have laid down the groundwork of a new meso-economics and mesoscientific episteme of inter-causality between the full domain of endogenous variables according to the monotheistic methodological worldview of unity of knowledge. This work extends the circular causality theme to meso-economics with a distinctive analytical outlook. It presents a critique and a substantive outlook of a truly Islamic ontological foundation of its meso-economic framework. The resulting abstracto-empirical methodology contrasts with the so-called mainstream economic formalism of existing ‘Islamic’ economics, finance, science, and society. By its abstracto-empirical formalism, this work has replaced the theological arguments centering on an unresolved meaning of causality. 12 Ozalp, M. (2016). God and Tawhid in Classical Islamic Theology and Said Nursi’s Risale-i Nur. Ph.D. Thesis, Department of Studies in Religion, School of Letters, Art and Media Faculty of Arts and Social Sciences, University of Sydney, Australia.

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The present work has also established the foundation of the truly Islamic methodological worldview of the Tawhidi groundwork of Islamic economics, finance, science, and society. The present work thereby claims that over the years since the inception of the catchword of ‘Islamic’ economics was due to the advent of some Indian scholarly thought in this regard and the embellishment of this ‘Islamic’ terminology by the oil-revenues of the Middle East. The convenience of the terminology was maintained by the political advantage of rich shareholders and institutions in the Muslim world. The climate of benignity in scholarship and global contribution, except for the massing of shareholders’ wealth by so-called ‘Islamic’ product designs and a questionably framed meaning attached to shari’ah contra the Tawhidi methodological worldview has persisted and deepened today.

The New Critical Orientation of the Work None of such states of intellectual weakness is acceptable in the great realm of Islamic worldview taken in the Tawhidi meaning as universal law centered on the ontological precept of the unity of knowledge and the generality and particulars of the world-system. It is just that, the gurus of the so-called ‘Islamic’ economics and finance have failed to open their heart, mind, and phenomenological outlook to the Qur’an and sunnah to understand the fundamental truth of Tawhid as the Law of ‘everything.’ All that has been pursued in vain comprise the footsteps of the rationalist paradigms. The Qur’an declares (6:125, explication by author in bracket): “Those whom Allah (in His plan of Tawhid as Law) wills to guide,- He opens their breast to Islam; those whom He wills to leave straying,- He makes their breast closed and constricted (non-Tawhid), as if they had to climb up to the skies: thus does Allah (heap) the penalty on those who refuse to believe (Truth of Tawhid as the Law of monotheistic Oneness).” Such belief is heightened and deepened by the understanding of the inter-causal organic relations between the cardinal elements of haqq al-yaqin (Tawhid), Ilm al-yaqin (Qur’an and sunnah as medium), and ayn al-yaqin (cognition of the world-system in terms of Tawhid = phenomenology). The intertwining of these experiences in the knowledge, space, and time dimensions intra-system and inter-systems embraces the substantive meaning of evolutionary sustainability.

Contribution The contributed chapters of this work will include the themes surrounding a methodological approach to Islamic economics and its criticism. The studies from all different points of analytical view are welcomed. Despite these alternative viewpoints, the meso-economic construction of ethics and economics as an

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endogenous phenomenon with analytical and applied perspectives is presented. In welcoming such wide perspectives on the abstract nature, methodological nature, and critique of what ought to be a true worldview of Islamic economics and finance in a broad socio-scientific perspective, it is hoped that fair treatment is given to various viewpoints on the methodology of Islamic economics and finance in a rigorous outlook upholding the Qur’an and sunnah as the primal ontological origin. The broad mesoscientific worldview is upheld. While exploring the possibility of Islamic economics and finance in the world of learning with the analytical methodological presentation the chapters of this work undertake applied and critical studies centered on the continuing theme of meso-economics of the wellbeing objective criterion and the alternative. The meso-economic application of parameterised ethico-economic embedding in the full-scale of inter-variable endogenous causality is a prime contribution of this work in its distinctive originality and contribution in socio-scientific field.This particular field of the Tawhidi worldview transcends both the non-Tawhidi intellection of mainstream economics and finance and the so-called ‘Islamic’ juristic interpretation of human-concocted narrowness of shari’ah in all its forms. Yet this is an issue for various authors in their contributions to explore with the full latitude of openness and fairness of scholarly views. This call for contributions also extends to areas of mainstream economics with a focus on analytical (econometric) methodology and applications that have the potential of investigating various critiques of rationality and aggregation axioms in the midst of treating the endogenous theory of ethico-economics. All aspects of methodological and applied questions are thereby welcomed including theories of microeconomic, macroeconomic, meso-economic organizational and institutional decision-making, and more.13 To end up this preface, Table 1 is intended to explain the generalized methodological worldview of the abstraction, application, and sustainable continuity of the primal ontology of Tawhidi organic oneness and its representation in the mesoscientific construct of the world-system.

Simon, H. (1987). “Decision making and organizational design”, in Pugh, D. S. (ed.), Organizational Theory, pp. 202–23, Penguin Books, Hammondsworth, Middlesex, England; Simon, H. (1957), Models of Man, New York, NY: John Wiley & Sons.; Feiwel, G. R. (ed.) (1989). Arrow and the Foundation of the Theory of Economic Policy. Macmillan, London, England; O'Donnell, R. M. (1989). Keynes: Philosophy, Economics and Politics, Macmillan Press Ltd., London, England; Parsons, T. (1964). The Structure of Social Actions, The Free Press of Glencoe, New York, NY.; Kahneman, D. (2013). Thinking, Fast and Slow. Farrar, Straus and Giroux. New York, NY.; Kahneman, D. & Tversky, A. (eds.) (2017). Choices, Values, and Frames. Cambridge University Press, Cambridge, England.

13

Meso-Economics

!

Abstraction: Methodology

Simulation IN Knowledge Space and Time Dimensions

Choudhury, M. A. (2018). “Endogenous ethics in evolutionary learning model contra utilitarianism: endogenous ethics.” Chapter 4 in Ethics and Decision-Making for Sustainable Business Practices, ed. Ionica Oncioiu, IGI-Inc. New York, NY.

Meso-Econometrics of Microeconomic Aggregation OF Choices by Preferences {℘(h)} AS, {h,X(h),t(h); ℘(h)} ℘(h) = [ interaction \ integration{℘ij(h)}(i,j)=1,2, …,n

-

As conceptual Wellbeing function, subject to circular causation relations between the entire vector of endogenous variables {h,X (h)}:Xi(h) = hi(h,Xj(h),t(h))i6¼j=1,2,….n h = W(X(h),t(h)) as quantitative form of wellbeing function derived by the Implicit Function Theorem of continuously differentiable W(..).statistical simulation and policy analysis follows by observing degrees of complementarities signified by the positive (or corrective negative) signs of the coefficients and the inter-correlations between the endogenous variables.

-

PROCESS 1

Of Evolutionary Learning followed by simulated reconstruction in knowledge, space, and time dimensions.

! Eval. W(h,X(h),t(h))

! f1 {h}!f2 {h,X(h),t (h)}

[X!S: (X,S)]

!….PROCESS N

Continuity

Evolutionary learning by recalling the Tawhidi Law

Application by evaluation of wellbeing function subject to circular causation relations between the entire vector of endogenous variables

Deriving unity of knowledge as episteme concerning the knowledge induced world-System, {X(h)} !PROCESS 2

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Continuum:sustainability in knowledge, space, and time dimensions

Monotheistic law Of origin of unity Qur’an and sunnah: Tawhid as Primal Ontological Law

Recall of primal ontology

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Phenomenology

Derived epistemology

Primal Ontology

Table 1 Synopsis of Tawhidi methodological outlook in reference to the primal ontology of unity of knowledge

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The Critical Nature of this Work in the Field of Islamic Intellection Indeed, the intellectual inquiry in this work in the field of critical examination of the presently existing understanding of Islamic economics, finance, science, and society is of seriously contrasting nature. That is not only due to the construction of qur’anic scientific thinking by critical inquiry of what has prevailed in the absence of the deeper understanding and its formalism in scientific thinking, ta’wil. The problem of the departure of the existing Muslim scientific program also owes to the inextricable embedding of so-called Islamic intellection into mainstream fields. Yet mainstream socio-scientific thinking stands for a great ontological and epistemological re-thinking that would allow the emergent deeply analytical study and its empirical viability of moral/ethical embedding in the socio-scientific inter-causal, evolutionary universe of endogenous systems and neurocybernetic.14 The unnecessarily overwhelming presence of shari’ah beyond its due commonality with the Qur’an has caused the abandonment of the deeper and socio-scientific analytical study of the Qur’an and its support by the sunnah in respect of the generality and particulars of the world-system that Tawhid as law explains. The present work studies many such critical issues and problems that contrast the conceptualization and application by Tawhid as law from the legalistic silence of shari’ah in all such deeply contextual studies of the world-system. While the critical intellectual studies of Tawhid and the world-system will continue to rise above the intellectually dormant field of shari’ah, yet the latter traditionalism will continue by sectarian long stay (madhab), the denial of the qur’anic practice of ta’wil in socio-scientific inquiry, and the undue impress of Wahabism and Salafism in this regard on the abandonment of qur’anic socio-scientific investigation (ta’wil). There is also the demeaning metaphysical illogicalness of Gnosticism in truly qur’anic socio-scientific thought and sheer narrative studies of Muslim thought through the ages (Nasr, 2003).15 This state of oblivious Muslim intellection respecting study of Tawhid and the world-system must change as this book advocates by its erudition. Thus, the content presented here is for the world scientific community beyond being limited to Muslim readership. Jakarta, Indonesia/Toronto, Canada

Masudul Alam Choudhury

Edel, A. (1970). “Science and the structure of ethics”, Neurath, O. Carnap. R. & Morris, C. (eds.) Foundations of the Unity of Science, Vol.II, Nos. 1-9, pp. 273–378, The University of Chicago Press, Chicago, ILL. 15 Nasr, S. H. (2003). Science and Civilization in Islam, Islamic Texts Society, Cambridge, UK. Also published by Harvard University Press, Cambridge, MA, USA, 1987). 14

Mesoscience

Inquiring the Micro-Ethical Endogenous Foundation of Aggregate Economic World-System Islamic Economics is neither a microeconomic nor a macroeconomic study framed in these mainstream dichotomies. The moral and ethical foundation of Islamic economics emerges from the possibility of symbiotic inter-causality at the mesoscales of methodology, behaviour, applications, and continuity. Integrated together by methodological abstraction and applications, the resulting mesoscale phenomenological study presents a distinctive methodological worldview of organic unity of knowledge. In the Qur’anic terminology this monotheistic worldview is referred to as Tawhid, the universal Law of ‘everything’16 “Meso-science implies there are some underlying principles that can unify different disciplines, and all disciplines may be involved in contributing available disciplinarily specific knowledge at corresponding levels to revealing common principles for meso-scales at all levels. A small change in the angle to view old problems could lead to a big progress in solving them.”17 Mesoscale herewith refers to a range of scale in between the micro- (element) scale and the macro- (system) scale and, within this range of scale, a characteristic structure exists, namely meso-structure, featuring dynamic heterogeneity in space and time, which is critical to the performance of the system. Parameters at the mesoscale are needed to bridge the mechanism at the element scale to the behavior of the system. The objective of mesoscience is to develop a principle as general as possible to make such a bridge for different levels of disciplines.18 The econometrics of mesoscience of Islamic economics does not question the appropriateness of mathematical usage in microeconomics and macroeconomics. Rather, the mesoscience question of intellectual discourse revolves around the Choudhury, M. A. (2012). “The ‘Tawhidi’ Precept in Science”, in MuzaffarIqbal (ed.) Studies in the Islam and Science Nexus Volume I, Ashgate, London, Eng. 17 Springer Nature, Engineering (2019). “What is meso-science or mesosciance?” Switzerland 18 Huang, W. Li, J. & Edwards, P. (2018). “Mesoscience: exploring the common principle at mesoscales”, Natural Science Review, 5:3, pp. 321–326. 16

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ontological methodology in the construction and evaluation of the emergent economic models and their implications. Islamic economics as meso-economics has its own distinct methodology and methods of abstracto-empirical formalism premised in the monotheistic law of unity of knowledge arising out of the Qur’an. It is called Tawhid. This primal ontology of Islamic economics and mesoscience is treated throughout this text as the universal law in abstracto-empirical formalism.

Contents

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Epistemic and Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reconstruction of Economic Theory with Epistemic Grounding . . . . Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Postulates of the New Heterodox Theory of Ethico-Economics Premised in Unity of Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . The Generalized Model of Circular Causation According to the Episteme of Unity of Knowledge . . . . . . . . . . . . . . . . . . . . . Monetary Perspectives in Islamic Economics as Mesoscience . . . . . Explaining Circular Causal Relations Between Micro-Money, Finance, and Real Economy (MFQ) . . . . . . . . . . . . . . . . . . . . . . . . Meso-Economic Formulation of Micro-Money Model in the EE(H) Version of the Islamic Economy . . . . . . . . . . . . . . . . . . . . . . . . . . The Formal Model of Micro-Money by Combining Expressions . . . Methodological Governance of Islamic Banks in the Meso-MicroMoney and Real Economy Relations . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ontoloical Foundation of the Theory of Economtrics in Unity of Knowledge by Inter-Causality . . . . . . . . . . . . . . . . . . . . . . . . . Inter-Causality (Circular Causation) in the Wellbeing Function . . . . TRUTH and FALSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consciousness and Ethical Endogeneity . . . . . . . . . . . . . . . . . . . . . Initiating Some Critical Concepts in the Building of the Econometrics of Circular Causation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Principle of Circular Causation in High Thinking . . . . . . . . . . . The Positive Wellbeing Criterion and Negative Wellbeing Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Circular Causation or Inter-Causality from the Ontological Core of (X, S) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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The Universality of (X, S) in Pervasive Consciousness of Unity of Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consciousness Modeled in Econometrics of Inter-Causality . . . The Nature of Morality/ethics in Econometrics of Mainstream and Circular Causation Fields . . . . . . . . . . . . . . . . . . . . . . . . Econometric Concerns Underlying Circular Causation Theory Versus Mainstream Economic Theory . . . . . . . . . . . . . . . . . . Generalized Economic Evolutionary Equilibrium Caused by Circular Causation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferences in Micro-Foundation of Macroeconomics . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

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Profit-Sharing Versus Interest Rate in Islamic Economics as Mesoscience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contrasting Mainstream Islamic Economics with the Tawhidi Methodological Worldview . . . . . . . . . . . . . . . . . . . . . . . . . . . . Formalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Case of Debt, Riba, and Profit-Sharing in the Formal Model Some Conceptual Issues Relating to Circular Causation Relations Between the Variables {R/I, R, F, R/D, h}[h] . . . . . . . . . . . . . . . Econometric Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix: Empirical Estimates . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Content Approach to Analytics of Islamic Banks by Meso-economics of Inter-causality . . . . . . . . . . . . . . . . . . . . . Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Econometrics (Quantitative) of Content Analysis (Qualitative) of Islamic Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Multivariate Wellbeing Model of Trade and Interest Rates . . . . . . . The Theoretical Implication of Tawhid as Monotheistic Oneness in the Econometrics of Circular Causation and Wellbeing . . . . . . . . Consequences of Misspecification of Objective Criterion in Islamic Institutional Policies for the Ummah (Muslim Comity of Nations) . . Empirical Inference of IDB’s Macroeconomic Failure of Islamic Paradigm Shift of SDG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Wellbeing Function is Estimated Subject to the Circular Causation Equations in their Log-Linear Forms . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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5

6

Objective Functions of Islamic Bank Bangladesh: A Critique of Islamic Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Objective and Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Critical Review of IBBL in the Light of the Theory of Micro-foundation of Macroeconomics and Its Econometric Features as the Truly Islamic Methodologically Embedded Methodical Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IBBL Mission and Vision . . . . . . . . . . . . . . . . . . . . . . . . . . . Absence of Modeling the Micro-foundation of Macroeconomics and Thereby the Wellbeing Goal in IBBL . . . . . . . . . . . . . . . . . A Prescribed Model of Endogenous Inter-causal Dependence for Asset Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Market Perspective of IBBL ‘Business Model’ . . . . . . . . . . Critical Examination of IBBL Data . . . . . . . . . . . . . . . . . . . . . . Circular Causation in IBBL Financing of Agricultural Sector, 2016–2017 (Millions of Taka) . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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The Meso-Economics of the Wellbeing Criterion . . . . . . . . . . . . Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Failed Understanding of the Wellbeing Concept in the Muslim World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Critical Review of Sen’s CF-Theory of Wellbeing . . . . . . . . . . Problems of Islamic Wellbeing Formalism . . . . . . . . . . . . . . . . . . . Space–Time Concept of Evolutionary Wellbeing in the Literature . . Concept of the Wellbeing Function in Space–time Structure of Economic Reasoning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Concept of Evolutionary Wellbeing in {Knowledge, Space, Time} Dimensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amartya Sen’s Wellbeing Form in CF-Theory in Terms of Pervasive Complementarities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The New Methodological Worldview of Wellbeing and Development Future with the Episteme of Unity of Knowledge . . . . . . . . . . . . . . Contrasting Tawhidi Epistemic Methodological Worldview to Neoclassical ‘Islamic’ Economics . . . . . . . . . . . . . . . . . . . . . . . Empirical Example of Quantitative Estimation of the Wellbeing Criterion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . h-estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Computing Socio-Economic and Islamic Financing Related h-values Over Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 Appendix: The IIE-Feature of Wellbeing Criterion as Extension of Roger Penrose’s Complexly Inter-Connected Triangle (Octagon) by the Methodology of Organic Unity of Knowledge (Tawhid) across ‘Everything’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 7

8

Imaging the Imaginary Events in Evolutionary Learning Trajectories of Wellbeing . . . . . . . . . . . . . . . . . . . . . . . . . Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Analytical Properties Along the Trajectory of History HH . . . Generalized Wellbeing Function . . . . . . . . . . . . . . . . . . . . . An Example of Continuous h-induced Simulation . . . . . . . . . Evolutionary Learning Property of Wellbeing Function in Its Exponential Compounded Wrapping . . . . . . . . . . . . . . Spatial Domain Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . Partial Elasticity Coefficients . . . . . . . . . . . . . . . . . . . . . . Input–Output Matrix Format of Generated Data . . . . . . . . . . Visualisation of Matrix Data Conversion into 2-D and 3-D . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Meso-economic Framework of Decision-Making . . . . . . . . . . . . . Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introduction: Some Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . Evolutionary Learning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IIE-Perspective in Evolutionary Learning . . . . . . . . . . . . . . . . . . Wellbeing Criterion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Analytical Nature of Endogenous Opposed to Exogenous Effects in a Firm’s Production Function . . . . . . . . . . . . . . . . . . . Formalism of the Evolutionary Learning Wellbeing Function in Unity of Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Generalized Form of the Structure and Functions of Evolutionary Learning Organization, Institution, and Social Order . . . . . . . . . . . . An Example of Evolutionary Learning by Unity of Knowledge: The Islamic Social Wellbeing Criterion of the Corporation . . . . . How the Evolutionary Learning Parameters of Knowledge-Flows {h} are Generated and Assigned? . . . . . . . . . . . . . . . . . . . . . . . . Dynamic Preference Formation in Islamic Corporate Relations . . . . Questions Relating to Islamic Evolutionary Learning Model of Organizational Behaviour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Endogenous Monetary Transmission by Meso-Economic Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ontological Effect of Money and Real Economy Variables . . . . . . . Monetary Policy by Monetary Transmission Mechanism in Meso-Economic Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monetary Transmission Model of Islamic 100% Reserve Requirement Monetary System . . . . . . . . . . . . . . . . . . . . . . . . . . . Monetary Transmission in the 100% Reserve Requirement Monetary System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Focused Review of the Literature . . . . . . . . . . . . . . . . . . . . . . . . Twarruq as an Example of Micro-Money in Islamic Financial Mobilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Empirical Results of Islamic Monetary Transmission Model for Bank Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Results of Data Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Simultaneous Ordinary Least Square (OLS) . . . . . . . . . . . . . . . . Vector Autoregressive (VAR) . . . . . . . . . . . . . . . . . . . . . . . . . . Discussion of the Monetary Transmission Model of [M,Sp,Q’](h) . . Empirical Analysis of the Monetary Transmission Model Without ‘h’-Parameter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monetary Transmission Model as Linkage Model of the Monetary Sector with the Three-Sector Real Economy with h-parameterization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wellbeing Function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statistical Analysis: Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wellbeing Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10 Money, Debt, Interest, and Real Economy . . . . . . . . . . . . . . . . . Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Analytical Approach of Investigation . . . . . . . . . . . . . . . . . . . The Existing State of Islamic Financial Instruments . . . . . . . . . . . . Tawhidi Ontology of Unity of Knowledge and the Formulation of the Generalized System of Meso-Relations Involving Money, Real Economy, Debt, and Interest . . . . . . . . . . . . . . . . . . . . . . . . . Monetary Policy Emanating from (M, Sp) Complementary Relationship via the Circular Causation Relations . . . . . . . . . . . . . . Monetary Transmission in the 100% RRMS . . . . . . . . . . . . . . . . . . Trade (T(h)), Gold (G(h)), Monetary M(h), Spending (Sp(h)), Interest Rate (i) and Debt (D) Interrelationships . . . . . . . . . . . . . . . . . . . . .

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Stability of Exchange Rate of Currency RRMS . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . .

in Circulation in 100% . . . . . . . . . . . . . . . . . . . . . . . 218 . . . . . . . . . . . . . . . . . . . . . . . 220 . . . . . . . . . . . . . . . . . . . . . . . 221

11 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227

List of Figures

Fig. 1.1 Fig.

Fig. Fig. Fig. Fig.

Fig. Fig. Fig.

Fig. Fig. Fig. Fig.

Exchange evaluation of events in knowledge, space, time dimensions across history HH . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 The generalized monotheistic ontological model construction in unity of knowledge particularized to inter-causality between micro-money, finance, and real economy (MFQ) . . . . . . . . . . 2.1 Ontological sensitivity of (X, S) via {h} in abstracto-empirical model construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Interactive-integrative endogenous variables in circular causation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Interactive, integrative, and evolutionary nature of S(h) . . . . . 3.3 Construction of the complex nature of interactive, integrative, evolutionary (IIE) History of learning events sustained in knowledge, space, and time dimensions as by inter-causal vector of endogenous variables, {℘, r/i, R, F, R/D,h}[h]t . . . . 3.4 Evolutionary convergences along the Event-History {HHp(S(h))} . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 Transcendence of intra-systemic results across sustainability of knowledge, space, and time dimensions . . . . . . . . . . . . . . . 5.1 IBBL does not have any particular precepts in its Mission and Vision that can be identified as especially Islamic in origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Comparative views of Corporate Governance: Islam and the other perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 A snapshot of blueprint for IBBL (Islamic Banks and IDB) ‘Business Model’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 TSR: The universal and unique grand design of Tawhidi Epistemic Relations in Wellbeing . . . . . . . . . . . . . . . . . . . . . . A6.1 Extending Penrose’s triangle (octagon) by the formal methodology of unity of knowledge of compounded evaluation of the wellbeing objective criteria . . . . . . . . . . . . .

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Fig. 7.1 Fig. 7.2 Fig. 7.3 Fig. 7.4 Fig. 7.5 Fig. 7.6 Fig. 9.1

Fig. 10.1

Fig. 10.2 Fig. 10.3

Fig. 10.4 Fig. 11.1 Fig. 11.2

List of Figures

Imaging the imaginary into the only nature of the world as the phenomenology of real-world . . . . . . . . . . . . . . . . . . . . Compounded historiographies of evolutionary learning paths . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intra- and inter-systemic compounded wrappings of evolutionary learning in historiography . . . . . . . . . . . . . . . Visualisation of sensitivity of elasticity coefficient on sectoral GDP Data in 2-D Surface . . . . . . . . . . . . . . . . . . . Sectoral contribution in 2-D surface . . . . . . . . . . . . . . . . . . . . State of sectoral linkages in 3-D visual display—between manufacturing and other sectors . . . . . . . . . . . . . . . . . . . . . . . Monetary transmission in 100% reserve requirement monetary system of (M-F-RE)[h endogenous complementary relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compound functional interrelations between money, real economy, debt, and interest rate according to Tawhidi worldview of unity of knowledge . . . . . . . . . . . . . . . . . . . . . . The evolutionary learning History of events by Tawhidi unity of knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monetary transmission in 100% reserve requirement monetary system of (M-F-RE)[h] endogenous complementary relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Complex cybernetic disaggregation of wellbeing indexes . . . . The extensive embedding by intra- and inter-causality of the generalized world-system . . . . . . . . . . . . . . . . . . . . . . . The property of intra- and inter- embedded system as non-Cartesian geometrical fractal . . . . . . . . . . . . . . . . . . . .

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List of Tables

Table 2.1

Table Table Table Table

2.2 4.1 4.2 5.1

Table 5.2 Table 5.3 Table 5.4 Table 6.1

Outline of the ontologically induced econometric model in circulation causation and permanent endogeneity of knowledge-induced variables of Truth and False in their respective evaluation criteria . . . . . . . . . . . . . . . . . . . Formalizing the underlying model of Table 2.1 . . . . . . . . . . . Approvals by entities and modes of financing ($ million) . . . Computing variable specific parameterised weights . . . . . . . . Sector-wise general investment, 2016–2017 (percentages of total investment) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mode-wise investment 2016–2017 (percentages of total investment) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percentage distribution of components of Agricultural Investment, 2016–2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cross-sectional conversion of surveyed data as in Table 5.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statistical data and averaged h-values, examining the performance of Islamic banks in Indonesia by their rural and urban sector operations on wellbeing, 2005–2014 . . . . . .

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Chapter 1

Epistemic and Economics

Abstract The theme of ethico-economics is introduced in terms of the interactive, integrative, and evolutionary learning properties of the epistemology of unity of knowledge. The attenuating methodology yields a unique and universal model of circular causation between the selected complementary variables. The circular causation model conveys the empirical possibility of ethico-economic problem-solving in the context of the epistemology of unity of knowledge. The empirical perspectives of epistemic and economics and the conforming formalism of unity of knowledge open up a vast coverage of policy-theoretic and strategic studies that contest with and provide distinctively different results and their explanations in the framework of heterodox economic theorizing involving ethico-economics. JEL classification B41 · B52

Background The classical works in economic thought had undertaken substantive inquiry in the field of epistemic and economic theory. It was the preoccupation of the Austrian School of Economics under the influence of Ludwig von Mises.1 Yet before this time, both Adam Smith2 and John Maynard Keynes3 were great epistemologists in their ideas to instil ethics in economic theory. Gunnar Myrdal4 was a sociological thinker in theorizing economic development by the concept of the wider field of valuation. In recent times G.L.S. Shackle5 has questioned the validity of neoclassical economic theory in respect of economic reality. The contemporary works of

1 von

Mises (1976). (1984). 3 O’Donnell (1989). 4 Myrdal (1958). 5 Shackle (1972). 2 Smith

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2020 M. A. Choudhury, Islamic Economics as Mesoscience, https://doi.org/10.1007/978-981-15-6054-5_1

1

2

1 Epistemic and Economics

Tony Lawson,6 George Soros7 and Petr Sztompka8 have opened up new economic thinking along lines of new ontological perspectives of economic thought, in reformulating financial theory of reflexivity of decision making, and formulating Marxist methodology within a Hegelian dialectical approach to social becoming. Lawson and Pesaran9 remark that the structure of economic theory has weakened on the face of its structural problems of economic methodology. Paradoxically, the ontological and epistemological approaches in the reconstruction of economic theory and economic thought has lost its tradition in recent times requiring fresh inquiry. Yet it is argued that, with the continued instability of economic and financial futures the orthodox and mainstream nature of economic prediction in an optimal closed social universe has failed to stand up to critical realism. On this issue writes Roy Bhaskar10 : “………. It is thus natural to generalize the problem of induction, involving influence from the past, to the future, to that of ‘transduction’, inference from closed to open systems”.

Reconstruction of Economic Theory with Epistemic Grounding It is therefore necessary once again to rethink economic and financial theory. This note explores the new epistemological possibility within a theory of pervasive complementarities between ethically determined choices of social possibilities. The meaning of unity of knowledge is gained from the property of such pervasive complementarities between variables that represent the attribute of continuity by participation. The emergent pervasive attribute of unity of knowledge by complementarities and participation between agents and their representative variables is the meaning of ethics in decision-making, resource allocation, and dynamic preferences of economic and financial behaviour. The emergent theory we are constructing is thereby contrary in epistemology and structure of explanation to all of economic theory that premises on the postulates of resource scarcity, and thereby on the economic rationality properties of pre-ordering of preferences, perfect information, marginal substitution, methodological individualism of self-interest, and competition. Wherewithal, in the emergent heterodox economic theorizing the epistemological question invokes the social embedding of ethics as evolutionary learning behaviour arising from the postulates of unity of knowledge. The episteme of unity of knowledge by the continuous circularity of cause and effect between complementary goods as the sign of sustainability is 6 Lawson

(1997). (1998). 8 Sztompka (1991). 9 Lawson and Pesaran (2009). 10 Bhaskar (1994). 7 Soros

Reconstruction of Economic Theory with Epistemic Grounding

3

the property of evolutionary learning. It causes dynamic preferences to replace preordered preferences as datum. Dynamic preferences along with evolutionary learning in unity of knowledge cause continuous reproduction of resources. This reinforces the complementarity and continuous repetition of learning in unity of knowledge. In the end, neither optimal states nor steady state equilibrium can exist. They give way to non-optimal dynamics in evolutionary learning equilibriums. As pointed out by Amartya Sen,11 the combination of ethics as evolutionary learning between complementary possibilities, negation of the assumptions of economic rationality, and deontological preference maps together define the new structure of economic thinking contrary to mainstream economics. Such emergent novelty of new ontological economic theory forms the order of epistemic and economics in today’s need to stem the tide of global financial instability and unpredictability in the optimum economic modeling (Lawson, 2012; Choudhury, 2014).

Objective The objective of this chapter is to expound briefly the outlook of the heterodox economic thinking in the direction of epistemic and economics to undertake the following explanations regarding such a theory: The evolutionary learning character of the emergent theory of the epistemology of unity of knowledge and its induction of the unified world-system by the complementary nature of choices involves the formalism and study of a nexus of inter-causality between the choices. Such intercausality conveys the methodological nature of social and economic embedding by cause and effect. Thereby, a system of circular causation equations between the inter-causal variables is formalized. Such a system allows for evaluation by repeated estimation and simulation of the first round of estimated coefficients to correct deficiencies of negative relationship between the variables into less negative to positive reconstruction. The negative relations denote marginal rates of substitution between the variables during any given process of evolutionary learning. Positive relations denote complementarities. The result then is sensitivity of changes in coefficients to policy-theoretic and institutional strategic issues. This chapter explains the interactive, integrative, and evolutionary nature of evolutionary learning equilibriums underlying market and institutional interaction, convergence, and dynamic continuity via the episteme of participation and change. The discursive nature of preference formation embedded in the decision-making induced by the episteme of unity of knowledge along with all this conveys the meaning of ethico-economic holism.

11 Sen

(1992).

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Postulates of the New Heterodox Theory of Ethico-Economics Premised in Unity of Knowledge The postulates upon which the new structure of epistemic and economics is based are the following ones. 1. None of the assumptions of the axiom of economic rationality exists. 2. The axiom of economic rationality is replaced by the axiom of unity of knowledge. 3. The concepts of opportunity cost and marginal rate of substitution in resource allocation are replaced by evolutionary learning processes in resource allocation. 4. All variables in resource allocation are interactively integrated in pervasive complementarities and thus form endogenous relations. 5. Variables are induced by unity of knowledge as episteme causing preferences to be dynamic. 6. Steady-state equilibrium and optimal resource allocation are replaced by evolutionary learning equilibriums and non-optimal states of learning in unity of knowledge. 7. The system treatment of inter-causal relations between variables leads into a unique simulation model of ethico-economic wellbeing objective function.

The Generalized Model of Circular Causation According to the Episteme of Unity of Knowledge The above-mentioned postulates yield the following generalized model of circular causation as the result of interactive, integrative, and evolutionary learning processes of inter-variable endogenous relationship with pervasive complementarities: Evaluation of the Social Wellbeing Function in unity of knowledge, θ = f(x(θ)), with vector variables induced by knowledge-flows over evolutionary learning processes. Knowledge-flows in accordance with the ranked degrees of complementary relations between the variables are denoted by {θ} over processes of learning. The term ‘evaluation’ means firstly to estimate followed by simulation of the first round estimated coefficients as deemed necessary for improving the degrees of complementarities between the variables in the light of policy-theoretic and strategic issues. The social wellbeing function is evaluated by the system of circular causation relations as follows:   xi (θ) = fi xj (θ) , i, j = 1, 2, . . . ; x(θ) = {x1 , x2 , . . .}

(1.1)

θ = f(x(θ))

(1.2)

The Generalized Model of Circular Causation …

5

Observations for {θ} are calculated as ranks by one such formula in a scale of 1– 10 by columns of the complementary variables: [(10/x*)*xc ]; ‘xc ’ denotes column (c) values. 10 being the highest ranked θ-value corresponding to x*. The average θ-value across all the variables by columns is determined by, (1/m)

    10/x∗ ∗ xc = Avg{q}c = q

(1.3)

c

Examples 1. Microeconomics: dynamic preference formation

Let ℘s (θ) denote dynamic preference (knowledge − induced) of the sth individual. (1.4) Collective dynamic (knowledge-induced) preference of a group formed by interaction I, integration I within any given process ‘p’ is given by, ∪ ∩ {℘s (θ)}p .

(1.5)

This is a meso-economic representation of preference formation in the ethically induced aggregate context. Dynamic evolutionary preferences arising from interaction ‘I’ and integration ‘I’ are denoted by variations in {θ} over processes of evolutionary learning as shown by,   (d/dθ) ∪ ∩ {℘s (θ)} p > 0, signifying continuity over knowledge − flows {θ} conveying unity of knowledge across evolutionary learning processes  p . (1.6) By a continuous mapping between {θ} and its induced variables x(θ) we obtain similar results for such variables induced by dynamic preferences as: {xj (θ ); ℘i (θ )} ⇔ {∪I ∩I xj (θ ); {∪I ∩I ℘i (θ )}

(1.7)

⇔ means circular causation formed by recursive relations. The circular causation system can be readily written down in reference to expressions (1.1) and (1.2). The induction and quantitative implication of θ-values as the degree measuring existing unity of knowledge and constructible degrees of unity of knowledge is the central analytical representation of episteme of embedded unity of knowledge between the selective variables. θ-values in the system of inter-causal relational equations between the endogenous x(θ)-vector, as in Eqs. 1.1 and 1.2, define the mesoaspects of the micro-ethical embedding in the aggregate modeling of an ethicizing

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economy. The resulting ontologically induced and analytical formulation of the interactive, integrative, and evolutionary (IIE) system of inter-causal relations between the x(θ)-variables form the wellbeing evaluation system of the meso-economic approach within the context of mesoscience of unity of knowledge. It forms the most central premise of the primal ontology of monotheistic oneness, Tawhid as Law in the Qur’an and sunnah (Islamic foundation). 2. Macroeconomics: Interrelations between money, finance, and real economy Proceeding with M denoting quantity of money; F denoting finance; Q denoting real output; and T denoting endogenous technology we obtain, Evaluate θ = f(M, F, Q, T)[θ]

(1.8)

Subject to, circular causation between {M,F,Q,T}[θ], as in the case of Eqs. (1.1) and (1.2). Policy implication of the macroeconomics of money, finance and real output relations is that, complementarity between these variables by way of their circular causation as endogenous relations cause continuous expansion in the output multiplier. Output is accentuated by the incidence of endogenous technology, (T(θ)). Thereby, the interactive and integrated circular causal relations between M(θ), F(θ), Q(θ), T(θ) cause extended price stability, increasing employment while denying the traditional concept of full-employment real output, and decreasing the rate of interest until it is phased out in the case of full complementarity between the given variables (Choudhury 2015).

Monetary Perspectives in Islamic Economics as Mesoscience Both mainstream economics and its submissive following by so-called ‘Islamic’ economics today treat money as aggregate macroeconomic medium of valuation of exchange of goods and services. The latter types of economic variables are also treated as macroeconomic entities. Exceptionally though in mainstream economic thought, the Austrian monetary tradition12 and a certain feature of the Quantity Theory of Money in terms of the equation of exchange13 have studied monetary relations with the real economy and spending in terms of what is referred to as equation of exchange. In this equation, the nearly exact value of spending and the quantity of money can be obtained in terms of the micro-units of money to match the spending context of valuation of real sector projects. In other words, such an equation of monetary-real sector valuation by identity of relations conveys the fact that, the quantity of money in circulation is equivalent to the correct quantity and 12 Yaeger

(1997). (1989).

13 Friedman

Monetary Perspectives in Islamic Economics as Mesoscience

H E(M,Q,S,k,θ)[θ]

H

7

connuity

Fig. 1.1 Exchange evaluation of events in knowledge, space, time dimensions across history HH

valuation on either sides of the exchange equation. Thus the quantity of money pursues the volume of spending in terms of the exchange value of goods and services. The equation of exchange implies this nearest-case of equality in money-real sector valuation in both cases of atemporal and intertemporal valuations and flow of money as economic species. Such market exchanges imply that, the project-specific spending while matching the quantity of money in circulation fits the spending in projects. Money and spending sides of the exchange equation are closely interdependent. In such an equation of exchange, the monetary exchange context of valuation and the quantity valuation of money can equate exactly or with a difference in the valuation of projects by the extent of the speed of monetary circulation. Such projects can be of real goods and services, and of financial assets. The extended valuation concept involves intertemporality. In the meso-economic argument, especially as explained by the inter-relational concept between money circulation and spending in economic projects, the ethical binding regarding the host of conscious choices of projects and the entire gamut of moral/ethical outcomes of real sector valuations matter. The intercausal relations in this respect configure the interactive, integrative, and evolutionary learning spaces of a process-oriented historical nature. In the above-mentioned inter-causal relations circularly connecting monetary circulation (M), real sectoral project output (Q) and spending (S), the degree of exactness of exchange valuation is denoted by the velocity of money circulation across transactions (k). The moral/ethical elementsare all induced by the θ-induced knowledge-flows. Thereby, all the valuation elements along with the centerpiece of θ-induction can be explained by Fig. 1.1. Such valuation events occur continuously both in the atemporal case (intra-system), and intertemporally (inter-systems) at continuous knowledge-induced (thus by sustainability of consciousness). Thereby, process-oriented evaluation event points of E(..) sustain themselves across the length and breadth of history HH. The meso-economic implication of the continuously knowledge-induced money and real sectoral activity implies the sustained existence of inter-causality in the elements of the vector, x(θ) = {M, Q, S, k, θ}[θ]. This kind of inter-causal dynamics between the variables caused by the conscious existence of θ-values is the distinctive nature of meso-economics of money and real economy in Islam. It is a significant theoretical and applied issue concerning the search and discovery for new methodological worldview, now based on the endogenous meaning of unity of knowledge by inter-causality between the variables. Furthermore, the Islamic concept of market valuation and the use of money in real economic activities fetch their values in the midst of market exchange. The microeconomic and macroeconomic nature of the vectors of variables and their inter-causal relations evaluate the ultimate objective of wellbeing under the precept of unity

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of knowledge. This episteme is contextual to the moral worldview of monotheism playing its role in markets and institutions. Thereby, simulation of the θ-induced variables generate corresponding policies to promote the transformation into pure exchange. Thereby, the endogenous interrelations between markets and institutions, thus microeconomic and macroeconomic variables, need to be noted. The underlying aggregation problem is thereby the essential nature of meso-economic theory. Thereby, in the resulting case of meso-economic theory institutions and markets interact to determine the meso-preferences by interactions, integration, and evolutionary learning. Such preference structure was formalized earlier in the section on dynamic θ-induced preference formation. Meso-economic theory based on the episteme of inter-causality arising from the premise of unity of knowledge in Fig. 1.1 gives rise to a special system of organic interrelations between money, finance, and real goods and services in the light of the precept of unity of knowledge. Interrelations between money circulation and real sector project-wise spending would thereafter continue on up to the limit of perfect equivalence in the exchange equation with k = 1.14 In every other case of a learning equation of money-spending relationship, the adjustment between money and the real economy would continue. Project-specific spending would then be short of perfect equivalence between the quantity of money and the value of spending. For such a case of less than perfect equivalence, the continuing interaction, integration, and evolutionary learning would hold for 0 < k < 1. Imminent inter-causality between the variables of the project-specific exchange equations would continue in their IIElearning processes between diversities of organismic relations. Such inter-causal relations that arise along the historical path of HH at every event principally yield the symbiotic meaning of unity of knowledge in the Qur’anic context of the organically paired universe.15 Such a foundational ontology of unity of knowledge that money, finance, and real economic entities display is a particular problem of meso-economic theory that is taken from the midst of the general and specific theories of the monetary phenomenon in the context of markets and institutions according to which the organic epistemic relational meaning of morality and ethics arise. The representative θ-values thereby characterize the ethicizing nature of unity of knowledge by inter-causal relations between goods, services, market exchange, and the nature of their exchange relationship in the midst of the monetary and financial flows. Accordingly, meso-economic theory presents the micro-project specific nature of money, finance, and real exchange by inter-causal endogenous relations. The organic nature of a paired universe representing the pervasively inter-causal complementarities forms the distinctive epistemic premise of the methodology of organic principle of monotheistic unity of knowledge. The emanating theory is applicable to both the atemporal case of intrasystem organic relations and the intertemporal case of inter-system organic relations. Mesoscience basis of meso-economic theory characterizes the study of both of paired 14 von

Mises (1976). (36:36): “Exalted is He who created all pairs—from what the earth grows and from themselves and from that which they do not know”. 15 Qur’an

Monetary Perspectives in Islamic Economics as Mesoscience

9

complementarities as being probabilistic in the event space of knowledge, space, and time dimensions across events that define the entire history, HH. In the context of the above explanation of the relational organic idea of morality, ethics, and the monetary function interrelating with finance and real goods and services in market exchange, the totality of the events shown in Fig. 1.1 forms the ethico-economic system (EE(θ)). We thereby define the ethico-economic system in its generalized form, and in the specific case of Islamic monetary relations in EE(θ) as the topological relationship of the probabilistic universe at all event points in HH. Formally we write, EE(θ) = {E(θ, x(θ), t(θ)}. EE(θ) is evaluated by the objective criterion of organic interrelationship in unity of knowledge. The objective criterion is symbolized by the wellbeing function, W(E(θ)) with dW/dθ > 0. The symbols in the particular case of the circular inter-causal relationships between money Mi (θ), finance Fi (θ), and real project-specific activity Qi (θ) variables are explained as follows by the choices consciously governed by the episteme of unity of knowledge. In the case of Islamic ethico-economics such choices are governed by the monotheistic worldview of organic unity of knowledge between the good things of life while avoiding the harmful choices.16 W(θ) = W(Mi Qi , Fi ,t)[θ]; dW/dθ = [∂W/∂x(θ)] · (dx(θ)/dθ) > 0 identically (1.9) W(θ) denotes the wellbeing criterion as represented by circular causation relations between the inter-causal variables for the i-projects. xi (θ) = {Mi (Fi , Qi , t)[θ], Fi , (Mi Qi , t)[θ], Qi (Mi , Fi , t)[θ]}

(1.10)

‘i’ indexed with the variables represents projects according to the broad definition of project given above. The grouping together of ‘i’-projects may be denoted by ‘pr’. At times we will drop the suffix ‘i’ and carry on to denote projects all the same in the following formalization. The function of {θ} as knowledge variable is based on the probabilistic nature of events. This conveys the meaning of incompleteness and evolutionary learning over points of time with the property of ‘nearest’ exact evaluation of events where the velocity of money circulation is exactly attained, i.e. k = 1.17 Furthermore, the ‘nearest’ exact evaluation in the probabilistic sense with the ontological premise of unity of knowledge in the EE(θ)-definition establishes the primal condition, i.e. {θ} ∈ (, S).  denotes the foundational ontology of unity of knowledge; S denotes the

16 Qur’an (14: 24–26): “See you not how Allah sets forth a parable?—A goodly word as a goodly tree, whose root is firmly fixed, and its branches (reach) to the sky (i.e. very high). 25. Giving its fruit at all times, by the Leave of its Lord and Allah sets forth parables for mankind in order that they may remember. 26. And the parable of an evil word is that of an evil tree uprooted from the surface of earth having no stability”. 17 Choudhury (2012).

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primal mapping that derives {θ} from . Hence, (, S) forms the primal ontological tuple of knowledge derivation in EE(θ). In the probabilistic sense, {θ} denotes continuous learning in reference to the ontological premise of (, S)—organic unity of knowledge of the monotheistic paired universe of ‘everything’. The meso-economic nature of the knowledge-variable {θ} and of the θ-induced {xi (θ)}-vector implies that, these variables cannot be aggregated in any sense of microeconomic preferences of economic rationality and by the macroeconomic aggregate variables concerning money and real economy. Thereby, the macroeconomic version of the quantity theory of money, as known, cannot be applied in any acceptable concept of aggregating the microeconomic money and real economic variables. The theory of monetary aggregates of macroeconomics and its economic consequences is thereby not conformable with micro-monetary concept and its implications in the theory of monetary transmission according to the quantity theory of money, prices, and the real economy.

Explaining Circular Causal Relations Between Micro-Money, Finance, and Real Economy (MFQ) Islamic Ethico-Economy (EE(θ)) takes its birth in the primal ontological premise of monotheistic unity of knowledge as the Universal Law.18 EE(θ) is inextricably established in the primal ontology of monotheistic unity of knowledge and its methodological conception in the generality and details of the world-system. The empirical methodology and moral-material embedded sustainability continues in recursive learning way across HH. The underlying properties of the process-oriented nature of the methodological worldview of monotheistic unity of knowledge presents a dynamic world-system based on interaction, integration, and evolutionary learning (IIE-learning processes) between the good things of life as life-fulfillment needs. This ontological premise is foundational in theoretical and applied contexts of EE(θ). Its degrees of evaluation of organic unity of inter-variable causality are evaluated by the objective criterion of the well-defined criterion (Arabic term for wellbeing is maslaha). The IIE-learning properties and the objective criterion of evaluating all details of EE(θ) indeed forms a socio-scientific inquiry. The meso-economic problem of evaluation of the wellbeing criterion by organic circular causality relations answers the following questions: (1) what are the foundational axioms upon which a consistent and authentic methodological worldview can be erected? (2) How does such a methodological worldview apply to the universal and particulars of a generalized system that characterizes various fields of meso-socio-scientific inquiry? These central questions are incapable of answers and the meso-socio-scientific analysis is impossible in the existing so-called ‘Islamic’ economics and its premise that is constricted by the juristic understanding of shari’ah and opinions (fatawa) based 18 Choudhury

and Rahim (2016).

Explaining Circular Causal Relations Between … S] { } x( [ ,S] Primal ontology of unity of knowledge and [

) [see expression 1.2] End of process 1 Beginning of process 2 etc. { ,x( )} Evaluaon of by recalling the method epistemology Wellbeing index of process 1 recursively of unity of Subject to the knowledge Circular causaon in worldRelaons in { ,x( ),t( )}: system Valuaon W(M,F,Q,t)[ ] [see expression 1] Subject to the circular causaon relaons: M( ) = f1(F,Q,t)[ ] F( ) = f2(M,Q,t)[ ] Q( ) = f3(M,F,t)[ ] Quantave wellbeing index = F(M,F,Q,t)[ ]

11 connuity connuous processes ontologically ending in [ ,S]

Fig. 1.2 The generalized monotheistic ontological model construction in unity of knowledge particularized to inter-causality between micro-money, finance, and real economy (MFQ)

on shari’ah as ways of Muslim sectarian understanding.19 The profusion of juristic rules embodies the whole of shari’ah of present days, marking its madhabi (sectarian) derivation over the ages of Muslim history.20 Tawhidas the law of unity of knowledge by inter-causal pairing (monotheistic pairing) between ‘everything’ contrasts shari’ah oppositely. It is important to note here that, the entire system of knowledge-induced learning processes of Figs. 1.1 and 1.2 along with their properties and most extensive analytical subtleties of ‘everything’ between the heavens and the earth, as the Qur’an declares, comprises the most substantive Qur’anic meaning. The paired world-system of unity of knowledge and its induction on being and becoming form the methodology as primal ontology of qur’anic monotheism and the world-system. Thereby the generality and details of the world-system and its evaluation by the wellbeing objective criterion of unity of knowledge are derived epistemologically. Thereafter, the meaning of sustainability as continuity of the Tawhidi methodologically induced IIE-learning processes abide in the endlessness of knowledge, space, and time dimensions. About such evolutionary learning entirety the Qur’an declares (2:156): “We belong to Allah and to Allah we shall return.” Such is the overwhelming reality from and to the primal ontology of Tawhid as law of unity of knowledge. This inter-causal wholeness processes through the world-system by its methodological abstraction and applications. They denote the Signs of Allah (Ayath Allah). In the exogenously framed model of causal relationship between money, finance, and the real economy (MFQ(θ)), the circular causation expression of the x(θ)-vector is unknown as an abstracto-empirical analytical system explaining pervasive unity of knowledge (complementarity, organic inter-causality) between the moral and ethical choices. For instance, in macroeconomics monetary policy is treated as an exogenous 19 Mahomedy 20 Kamali

(2013). (1991).

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variable. Finance denoted by fiscal policy variable is also of an exogenous nature. Thereby, the embedded moral and ethical sustainability along the life-fulfillment regimes of development and wellbeing21 cannot be explained and realized. The strongly endogenous nature of circular causation relations between the x(θ)vector (see expression (1.2))22 breaks down. The so-called ‘Islamic’ economics is an exogenously framed ethical study of extraneous moral values in the economic and financial system. The consequential effects are felt in the institutions of markets and policy-making. Such a nature of the ‘Islamic’ economy cannot formalize a processoriented theory of micro-money and the real economy. A category of micro-money are the crypto currencies. Money in existing ‘Islamic’ economics is considered as a mainstream macroeconomic aggregate. Such an exogenous variable therefore is incapable of answering the embedded moral-ethical episteme of organic unity between the endogenous variables. In the face of all such exogenous relations it is impossible to formulate a deconstructed explainable version of the monetary model of exchange as a market-driven and project-specific meso-economic system of inter-causal relations between endogenous variables.

Meso-Economic Formulation of Micro-Money Model in the EE() Version of the Islamic Economy The following kind of micro-money aggregation by inter-causality is unknown in ‘Islamic’ economics and finance. Yet this is the formulation of the meso-micro-money in Islamic meso-economic perspective: Meso-Aggregation of micro-money valuation   i Mi (θi ) · vi (θi ) = i Ti pi [θi ] = M.v = I.p,

(1.11)

the project-specific version of equation of exchange. vi (θi ) denotes {θi }-induced velocity of money circulation across ‘i’-projects. Ti denotes {θi }-induced transactions in ‘i’-projects. pi (θi ) denotes{θi }-induced prices of ‘i’-projects accounting for transactions, Ti . T denotes macroeconomic aggregate number of transactions. Ti (θ) denotes project-specific number of transactions, such as, a number of bread sold or distributed through Hunger-Alleviating Project, which is induced by θi -value of social consciousness to yield affordable stable price-value induced by θ, namely pi (θ) in the wellbeing function. Ti furthermore contains the variables, (Fi ,Qi )[θi ]. {vi (θi )} are the project-specific velocity of money circulation, yet different from the macro-monetary aggregate version of the velocity of money circulation denoted by ‘v’. The meso-economic nature of the entire model is conveyed by the effectiveness of θ-induction of the variables with their meanings found in the 21 Masud 22 Desai

(1995), Rawls (1971), Streeten (1981). (1989).

Meso-Economic Formulation of Micro-Money Model …

13

wellbeing impact of the methodology of unity of knowledge by circular causation showing inter-variable endogenous complementarities. With  i (Ti pi )[θi ] denoting value added of all meso-project transactions, expression (1.12) can be written as, [i Mi (θi ) · vi (θi )]/i vi (θi )] · [i vi (θi )]        =j Ti pi [θi ] = Mpr · vpr θpr = (T.p) θpr ,

(1.12)

This equation applies to all projects in the project-specific groups (‘pr’) of valueadded in relation to the quantity of money in circulation. Notwithstanding, the project group-specific micro-money flow with its weighted average, as shown in expression (1.12), is not equal to the macro-money version of the equation of exchange, M.v = T.p Equation (1.12) can be re-written in the weighted average form,      Mpr · vpr θpr = (T · p) θpr .

(1.13)

The following inferences can be drawn from this meso-economic version of the micro-money equation of exchange: (1) The quantity of money equals the value of spending. This equation of valuation becomes exact when vpr (θpr ) = 1 (earlier written as k − 1), meaning full mobilization of quantities of money in ‘i’-projects taken individually by proportions of monetary transmission and together in project groups denoted by ‘pr’. That is the valuation of money exactly equals the value of spending measured in terms of the ‘i’-projects group in respect of their value-added (T.p)[θpr ]. However, a fractional value of the velocity of money circulation denoted by vpr (θpr ) is acceptable and instructive. It implies the existence of a probability margin towards attaining exactness. Thereby, in such a situation there remains the continuous scope for interactive, integrative, and evolutionary learning (IIE-learning process) in and between the xi (θ)-vector of variables, as in expression (1.1) in the market economy. The underlying knowledge-induced preferences and menus linked with projects participate in institutional discourse. This activity increases the velocity of money circulation by advancing the choices of the life-fulfillment regimes of reconstruction of the moral-material embedded economy, EE(θ).

The Formal Model of Micro-Money by Combining Expressions The following steps lead toward the construction of the formal meso-economic model of micro-money interrelating with finance and the real economy (i.e. the MFQ(θ)formal model) in the framework of Islamic ontological foundation of monotheistic

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unity of knowledge and its consilience functioning in the world-system; mesoeconomy being a particular case. The wholeness of the inter-causally unified mesoeconomy EE(θ) and its components is specified by the system of interaction, integration, and evolutionary learning processes interconnecting money, finance, and the real economy (MFQ).23 Figure 1.2 outlines this model construction explained by its attributes. In the generalized meso-economic model of EE(θ) particularized to micro-money, finance, and real economy (MFQ(θ)) taken intertemporally, the following attributes are noted: 1. Primal Ontological Law of unity of knowledge, [,S] → epistemology, {θ} → yielding functional ontology, {θ,x(θ),t(θ)} → yielding recursively continuous processes of the same type at every moment of time as indicated by the specific knowledge-induced event-time point E(θ) on history HH. 2. The Process-Oriented Continuity Implies Interaction in Deriving {} ∈ [,S], the Mathematical Open and Unbounded Super-Cardinal Topological Domain (Choudhury, 2017).24 3. The attribute of integration is explained by simulacra of probability limits denoted by, plim{θ} = θ* ∈ [, S] with recursive discourse. Hence convergence remains incomplete in simulacra along HH. Only evolutionary learning abides. Likewise, plim{x(θ)} = x*(θ*) ∈ [, S] in terms of the defining primal ontological law.25 According to Fig. 1.2 the ontological derivation of unity of knowledge and its embedding in the details of the generality and particulars of the world-system by a continuity of epistemological derivation and construction of functional ontologies26 goes through evolutionary learning sequences of systemic unification over knowledge, space, time dimensions. The choices of money, finance, real economic activity, and goods and services with their intertemporal property of continuity over knowledge, space, and time dimensions assume their intrinsic forms within the epistemological derivation from the primal ontology of monotheistic unity of knowledge in EE(θ). Such primal ontological property of unity of knowledge assumes the extensive participatory (complementary) form. Thereby, micro-money becomes targeted spending in projects and their groupings (mutually inclusive projects, sectors, and their diversifications of extended life-fulfilling kinds). Micro-money in its spending 23 Choudhury

(2015). (2017). 25 Qur’an, (18:19) implies how money is a moral and ethical entity, a manifestation of the sign of monotheistic unity, and that meaning of value is induced by the ontological law. The monotheistic law of unity of knowledge by complementary pairing inducesthe vector, x() = {M,F,Q}[]in simulacra of evolutionary learning processes of ontological derivation, epistemological reconstruction, and continuity of functional ontologies. These properties are recursively sustained in similar ways across events, {E(,M,F,E,t)[]} in valuation of wellbeing. The Qur’an (18:19) declares in this regard: “…. So send one of you with this silver coin of yours to the city and let him look to which is the best of food and bring you provision from it and let him be cautious. And let no one be aware of you”. 26 Maxwell (1962), Gruber (1993). 24 Choudhury

The Formal Model of Micro-Money by Combining Expressions

15

helps in establishing the life-fulfilling regime of development. Such meso-economic transformation premised on ethico-economic unity of organic relations between the choices conducive of unity of knowledge by extensive participation for generating wellbeing activates private sector.

Methodological Governance of Islamic Banks in the Meso-Micro-Money and Real Economy Relations Institutions such as Islamic banks in EE(θ) exercising morally conscious choices and mobilization of micro-money circulation across the span of historiographical continuity as of HH in Fig. 1.1 ought to understand the dynamics of ontologically premised participatory financing and development instruments to attain ever moving sustainable wellbeing as objective criterion. Likewise, Islamic development financial institutions ought to know the same so as to replace the existing so-called Islamic financing by debt-ridden instruments. Islamic banks and development financing institutions base their legitimacy of financing by a plethora of debt-ridden financing instruments. Islamic economics in its present state of scholarship and practice are therefore unable to disentangle themselves from the resulting impossibility of avoiding interest (riba) and establishing a truly Islamic capital market, real economy, and the transmission of micro-money accordingly towards realizing a new Islamic financial architecture.27 The consequential monetary and real economy resource circulation representing the circular causation as shown in Fig. 1.2 now takes the following form with its catalytic inner dynamics in resource mobilization: The inter-causal nature of simulation of the entire wellbeing function subject to the system of inter-variable circular causation is carried outfor generating better degrees of inter-variable complementarities in light of the choices of possibilities according to the ontological precept of unity of knowledge. Such choices are done by improvingthe signs of the statistically estimated coefficients of the variables of the circular causation system of relations. Figure 1.2 explains this stage of the abstracto-empirical phenomenology of simulating the wellbeing objective function in respect of its methodological background. We now note that in the project-specific case the following interrelations would abide:     M ↑⇒ f ↑⇒ r ↓⇒ c ↓⇒ P∧ → 0 ⇒ y ↑⇒ R ↑⇒ Q ↑⇒ ρ ↑ (θ),

(1.14)

Pˆ denotes rate of change in price level; (Pˆ → 0) denotes attainment of price stability.This feature of MFQ(θ) avoids the problem of monetary plague in the midst of asset-price inflation.28 The chain (1.6) of interrelations is influenced by the impact of evolutionary learning. ‘θ’ is embedded in the circular causation variables.In the 27 Choudhury 28 Brown

(2010). (2015).

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MFQ circular causation model of the wellbeing criterion in EE(θ), which we may now refer to as MFQ(θ) circulatory model,the critical levels of complementarities to study are those between the monetary regime characterized by {M,R}[θ]; the spending regime f(r,R)[θ]; and the real economy {y, Q, Pˆ, R, }[θ]. ‘R’ denotes the rate of returnon real assets. denotes technological change and inherent aggregation of preferences and menus along the IIE-learning processes. This functionality of dynamic knowledge-induced aggregation of preferences was explained earlier. y denotes real income. Rest of the variables were defined earlier. These MFQ[θ]-relations explain that,increasing ‘R’ and stable ‘P’ levels replace interest rates(r) and cost of capital (c) withthe relationship between inflation (Pˆ → 0), money, spending, and real economy circular effects.29 That is, a certain price target is set. Inflation gravitates towards a zero rate; and spells out the endogenous monetary policies needed to maintain the zero-inflation target. Now the Central Bank (CB) becomes a joint venturist with the private sector (commercial banks) in order to promote market deepening and widening. Prices are stabilized under the impact of the target of zero inflation rate. The generalized interactive, integrative, and evolutionary learning system (IIE) yields endogenous change with technology () and the continuous evolutionary learning behaviour of the inner variables, as shown in expression (1.6). Expression (1.6) can thus be cogently applied to the case of simulating the wellbeing objective, subject to circular causation relations between the endogenous variables. The underlying meso-economic properties and modeling are thus discovered for micro-money and real economy interrelationship.

Conclusion This chapter introduces the salient explanation of a new epistemic way of reconstructing economic theory with ethical and social embedding in terms of pervasive complementarities between the selected variables. The epistemological premise of the complementary way of understanding inter-causal relations between the variables induced by knowledge-flows is the perspective of a methodological worldview of unity of knowledge. The methodological foundation of such an ethico-economic way of inter-relating the endogenously embedded variables gives rise to the model of circular causation. It forms a unique and universal model arising from the epistemological roots of unity of knowledge and the properties of interaction, integration, and evolutionary learning in unity of knowledge across learning processes. Such a model forms the generalized computational evolutionary equilibrium model in the quest for mesoscience of Islamic economics. From it particular problem-solving cases are derived. Thus a robust heterodox direction of ethico-economic formalism is established in the epistemic and economic context of unity of knowledge. In EE(θ) as a whole in the architecture of Islamic economy as meso-economy, the embedding of every variable in its pervasively endogenous state by the episteme 29 Benanke

and Mishkin (2007).

Conclusion

17

of unity of knowledge, {θ}, derived ontologically from (, S), conveys the endogenous nature of interaction, integration, and evolutionary learning everywhere and in everything. {θ} in this organically relational form invokes the essential centricity of moral consciousness. It thereby affirms the epistemic effect of unity of knowledge in both the organic causality of relations between the good things of life and the differentiating effects of ethics-benign regime of economic reasoning. The greatly extended explanatory effects of θ-induction of trade financing instruments contrary to the existing ‘Islamic’ economics of debt-financing instruments are unknown in ‘Islamic’ economics of the present genre. The resulting intellectually benign outcome of the so-called ‘Islamic’ economics is steeped in the microeconomic and macroeconomic mainstream dichotomy and their theories. Consequently, the resulting debt-ridden Islamic economics and financing remain gripped in atemporal and intertemporal meanings of asset valuation by interest (riba) as cost and efficiency of capital. The positive effects of trade-related participatory financing instruments are unexplained intellectually and unrealized institutionally.

References Benanke, B., & Mishkin, F. S. (2007). Inflation targeting: A new framework for monetary policy. In F. S. Mishkin (Ed.), Monetary policy strategy (pp. 207–226). Cambridge, MA.: The MIT Press Bhaskar, R. (1994). Plato etc. London, England: Verson. Brown, B. (2015). A Global Monetary Plague. London, Eng: New Palgrave. Choudhury, M. A. (2010). Unity of knowledge versus Kant’s heteronomy with a reference to the problem of money, finance and real economy relations in a new global financial architecture. International Journal of Social Economics, 37(10), 764–778. Choudhury, M. A. (2012). Islamic economics and finance: An epistemological inquiry, Emerald Publications in its series. Contributions to economic analysis (Vol. 291). UK: Bingley. Choudhury, M. A. (2015). Monetary and fiscal (spending) complementarities to attain socioeconomic sustainability. Oxford Journal of Finance and Risk Perspectives Special Issue of Social and Sustainable Finance, 4:3, 63–80. Choudhury, M. A. (2017). A Phenomenological Theory of Islamic Economics. Kuala Lumpur, Malaysia: University of Malaya Press. Choudhury, M. A., & Rahim, H. A. (2016). an epistemic definition of Islamic economics. ACRN Oxford Journal of Finance and Risk Perspectives, 5(2), 106–120. Desai, M. (1989). Endogenous and exogenous money. In J. Eatwell, M. Milgate, & P. Newman (Eds), The new Palgrave: Money. New York, NY: W.W. Norton. Friedman, M. (1989). Quantity theory of money. In J. Eatwell, M. Milgate, & P. Newman (Eds.), New Palgrave: Money. New York, NY: W.W. Norton. Gruber, T. R. (1993). A translation approach to portable ontologies. Knowledge Acquisition, 5(2), 199–200. Kamali, M. H. (1991). Principles of Islamic jurisprudence. Cambridge, Eng: Islamic Text Society. Lawson, T. (1997). Economics and reality. London, England: Routledge. Lawson, T., & Pesaran, H. (2009). Keynes’ economics methodological issues. London, England: Routledge. Mahomedy, A. C. (2013). Islamic economics: Still in search of an identity. International Journal of Social Economics, 40(6), 556–578. Masud, M. K. (1995). Shatibi’s theory of meaning. Islamic Research Institute: International Islamic University, Islamabad, Pakistan.

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Maxwell, G. (1962). The ontological status of theoretical entities. In H. Feigl & G. Maxwell (Eds.), Minnesota studies in the philosophy of science, Vol. II: Scientific explanation, space and time (pp. 3–27). Minneapolis, Minnesota: University of Minnesota Press. Myrdal, G. (1958). The principle of cumulation. In P. Streeten (Ed.), Value in social theory: A selection of essays on methodology by Gunnar Myrdal. New York, NY: Harper & Brothers Publishers. O’Donnell, R. M. (1989). Keynes: Philosophy, economics and politics. London, England: Macmillan Press Ltd. Rawls, J. (1971). A theory of justice. Cambridge, Massachusetts: Harvard University Press. Sen, A. (1992). Conduct, ethics and economics. In On ethics & economics (pp. 88–89). Oxford, UK: Basil Blackwell. Shackle, G. L. S. (1972). Epistemics and economics. Cambridge, England: Cambridge University Press. Smith, A. Eds. D.D. Raphael & A.L. Macfie. (1984). The theory of moral sentiments. Indianapolis: Liberty Fund. Soros, G. (1998). Fallibility and reflexivity. The crisis of global capitalism (pp. 3–45). New York, NY: Public Affairs. Streeten, P. (1981). From growth to basic needs. In Development perspectives. New York: St. Martin’s Press. Sztompka, P. (1991). Society in action. The Theory of Social Becoming: The University of Chicago Press, Chicago, ILL. von Mises, L. (1976). The ultimate foundation of economic science. Kansas City, Kansas: Sheed Andrews & McMeel. Yaeger, L. B. (1997). The fluttering veil, essays on monetary disequilibrium. Indianapolis, IN: The Liberty Press.

Chapter 2

Ontoloical Foundation of the Theory of Economtrics in Unity of Knowledge by Inter-Causality

Abstract As claimed often, religion and science, be this in meso-economics and mesoscience, are not in conflict. That is true only if the explanation is based on reasoned analyticity. Indeed, the universal law of monotheistic oneness is unravelled by the signs of God as the ones that are explained in the order and scheme of all things. Such a reasoned unravelling of reality is both by way of abstraction that leads into analytical logical formalism, as it is also phenomenological in explanation, application, empiricism, and sustained continuity across knowledge, space, and time dimensions. The construction of the underlying ontological, epistemological, and phenomenological worldview arises from Tawhid (monotheism) as the universal and unique law. This chapter explains these details.

Inter-Causality (Circular Causation) in the Wellbeing Function The econometric theory of inter-causality between the entire set of variables and their specific parametric representations is premised on the primal ontology of the system of relations pertaining to the problem under theoretical and empirical investigation. The resulting organic (symbiotic) interrelationships that are explained between the variables and parameters bring out their relations specific to the epistemological meaning of the ontologically based theory of inter-variable endogeneity. The primal ontological basis of the emergent new econometric theory of full inter-variable endogeneity is derived from the principle of extensive complementarities between them. The inter-variable complementary relations including the parametric ones can be a mix of positive or negative signs with the respective explanation for such signs in the pertinent model of wellbeing. The same phenomenon is ontologically explained by means of the correlation coefficient, positive or negative, respectively, between the variables and parameters.

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2020 M. A. Choudhury, Islamic Economics as Mesoscience, https://doi.org/10.1007/978-981-15-6054-5_2

19

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2 Ontoloical Foundation of the Theory of Economtrics …

Primal ontology1 firstly establishes the foundation of the nature of the worldsystem under study in the problem-domain. The primal ontology delineates the TRUTH nature of the world-system in generality and details in terms of the universal and unique principle of unity of knowledge. Knowledge thereby is epistemologically derived from the concept of organic (symbiotic, neurocybernetic)2 inter-causality between the representative variables of the problem and issue under study. On the other hand, the FALSE nature of the world-system is delineated by oppositeness of conflict and competition between the entities represented in the study. Such latter properties are exhibited by the neoclassical economic marginal rate of substitution. Consequently, the axioms of economic rationality, scarcity of resources, competition, optimization, and steady-state equilibriums are thoroughly contested and reduced to illogical characterization of the ontological-cum-epistemological learning entities of the world-system and the problem under study.

TRUTH and FALSE The meaning of TRUTH (hence goodness) as organic meaning of unity of knowledge qua pervasive complementarities and thus by inter-variable causality is in terms of the effect of such systemic relations on the particularities and total measure of the wellbeing consequence. The meaning of FALSE (hence falsehood) refers to the negative consequences, such as of conflict, competition, deprivation and scarcity, methodological independence and individualism between the particular representations and on the total measure of wellbeing. Such negative effects are caused by specific choices of the entities represented by their variables on the particulars and total measure of wellbeing. Choices and decisions are finally caused by human consciousness and moral/ethical actions in self and society, the global neighbourhood at large. Consciousness is endogenous ethical actualization in self and other. It is explained by the combination of coexistence signified by pervasive complementarities between the good things of life while avoiding the false things of life and their quantitative evaluation for moral-material coterminous sustainability.

1 Ontology means the theory of existence of being. Primal ontology

is the originary principle of the existence of being, as in the case of existence of God as the first principle of creation. Functional or portable ontology means the functional becoming of being as in the Dasein concept of spiritual uplife into higher stages of knowledge given by Heidegger (.) and in the sixty veils of light to know Allah as in Ghazali’sNich of Lights (Buchman,). Buchman, D. trans. (1998). Al-Ghazzali Niche of Lights, Brigham University Press, Provo, Utah.Karim (n.d.Karim, F. (undated) Imam Ghazali’sIhyaUlum-Id-Din, Shah Muhammad Ashraf, Lahore, Pakistan. 2 Cantner, Gaffard, and Nesta (2009) and Choudhury (2010).

Consciousness and Ethical Endogeneity

21

Consciousness and Ethical Endogeneity Contrary to the evaluation of the positive effects of conscious choices of the good things of life on the wellbeing criterion measure; the false things contribute to the negative effects on the wellbeing criterion, whereas it contributes positively to the function of negative wellbeing.3 The conscious invoking of the good and bad things of life involves guidance by the text of the primal ontological law, self-induced realization, and a degree of enforcement by institutional power if not in the individual then in social context. Examples of enforced social contracts are policing the market process by controls and guidelines; policed rules of corporate social responsibility; policed institutional governance by rules of good corporate governance. An ideal state of endogenous socio-economic transformation shows a deepest self-actualization of self-motivation and a minimal need for policing exogenously—that is externally. Thus, knowledge of coexistence as the highest sign of unity of knowledge between self and the other conveys the highest level of consciousness. This also marks the best approach to sustainability of the conscious acceptance and practice of the good things; and the inversely minimal level of falsehood. The following are some examples of endogenous nature of ethics and its induced variables: Conscious duty abounds propensity in human belief and consciousness to act in the right and just way to self and other. In this way, policing of justice by the courts of law is superseded firstly, by the approach to natural commitment to justice by settling contested matters outside the court by friendly will. Political contention can be resolved by inter-country and inter-regional agreements and non-partisanship. An example of such a case is of the Scandinavian countries and Switzerland. These countries give preference to mutuality of agreements over taking sides. In the market case of endogenous choices, preferences are driven by knowledge impact regarding the good things of life in the choices. Examples in this area are choices of health protection goods and rejection of contrary goods; choices of socially beneficial goods and rejecting conspicuous consumption. It is likewise the case with socially wasteful production to reject and life-fulfillment needs to accept. Environment protection gains self-conscious knowledge of protecting the future generation of all forms of resources for the common good. In development studies wellbeing receives predominance over growth and development with the desire to choose life-sustaining regimes of development by the wellbeing criterion. Thus endogenous growth and development receives preference over the notion of scarcity of resources to compete and optimize growth as in conventional macroeconomic theory. Contrary to the deontological meaning of ethical endogeneity,4 ethical conduct of exogenous nature require costly policing by regrettable, such social enforcement by policing of courts of law, penalties, and chiselling behaviour of institutions and producers. Examples of such cases are costly imposition of Corporate Social Responsibility and Corporate Governance that require contentious enforcement designs. 3 In

the Islamic nomenclature, the wellbeing criterion is referred to as maslaha; negative wellbeing function is referred to as mafasid. 4 Sen (1988).

22

2 Ontoloical Foundation of the Theory of Economtrics …

Table 2.1 Outline of the ontologically induced econometric model in circulation causation and permanent endogeneity of knowledge-induced variables of Truth and False in their respective evaluation criteria

Contrary to endogenous realization of life-sustaining patterns of growth and development, developing countries have been led to commit ghastly problems of social wellbeing.5 Such macroeconomic policy-theoretic approaches are opposed by the theory and application of econometrics of circular causation concerning the wellbeing criterion.

Initiating Some Critical Concepts in the Building of the Econometrics of Circular Causation The critical early concepts in the building blocks of the econometric theory of circular causation (inter-causality) are described by the following abiding relationship on stages of formulation of epistemologically derived ideas and their passage into empirical evaluation.6 Table 2.1 further translates Table 2.1 into the symbolic form. This presents the model that is permanently derived from the primal ontology of unity of knowledge and is applied to the qualitative and quantitative analytical study of ‘everything’.7 A particular case of this holistic system is the formulation of the econometric model. 5 Streeten

(1981). (1993). 7 Choudhury (2019). 6 Gruber

Initiating Some Critical Concepts in the Building …

23

The ontologically derived knowledge parameter and its pervasive induction of all variables in the wellbeing function is shown in Table 2.2. The resulting abstractoempirical way as the integrated way of explaining the embedding of moral and material values is measured by the wellbeing function subject to the system of nonlinear forms of circular causation relations in respect of unity of knowledge. This case is brought out by the formulations shown in Table 2.2. Table 2.2 Formalizing the underlying model of Table 2.1

24

2 Ontoloical Foundation of the Theory of Economtrics …

The same structure of the wellbeing model and its inter-causal relations apply to the problem domain of the False. Yet the specifications remain different from the wellbeing model entirely. The symbolic representation of the model shown in Table 2.2 brings out a number of critical concepts that will be used throughout this work in formalizing the theory of circular causation with the ontology of organic unity of knowledge. Indeed, one notes the central role that the theory of circular causation as social causation and the natural understanding of scientific phenomena held up among some great thinkers on the ontology of social and physical reality. On the issue of the open-ended cybernetic nature of the universe in symbiotic unity between ‘everything’ Kant (trans. Friedrich, 1940, p. 261) expressed his distinctive ontological thought in the following words: “Two things fill the mind with ever new and increasing awe and admiration the more frequently and continuously reflection is occupied with them; the starred heaven above me and the moral law within me. I ought not to seek either outside my field of vision, as though they were either shrouded in obscurity or were visionary. I see them confronting me and link them immediately with the consciousness of my existence.”

The Principle of Circular Causation in High Thinking The circular causation model is well-known in mainstream economics, although it was discussed though not formulated by Myrdal.8 The failure of mainstream economics is its inability to incorporate the circular causation model as an evaluative technique. Mainstream economics merely points out the importance to note, yet just the exogenous nature of the ethical element in socioeconomic field. Thus this failure of mainstream economics can be encapsulated in the central cause of the absence of evolutionary learning, and thereby, of the wellbeing objective criterion with complementarities in the socioeconomic and ethical sense of the variables. Ghazali9 wrote on the principle of causality and its imminent events: In brief, every event has a temporal cause, until the chain of causes terminates with the eternal celestial motion, where each part is the cause of another. Hence, the causes and effects in their chain terminate with the particular celestial motions. Thus, that which is a representation of the movements is a representation of their consequences and the consequences of their consequences to the end of the chain. In this way, what will happen is known. For [in the case of] everything that will happen, its occurrence is a necessary consequence of its cause, once the cause is realized. We do not know what will happen in the future only because we do not know all the causes [of the future effects]. If we were to know all the causes, we would know all the effects.

8 Toner

(1999). (1997).

9 Ghazzali

The Principle of Circular Causation in High Thinking

25

On the phenomenon of continuity over time by repeated simulation Fitzpatrick10 writes: “everything is a reproduction of other reproductions. Society explodes in on itself and we cannot liberate ourselves from the simulacra…” In the physical sciences too, a similar experience of simulacra abides. Hawking and Mlodinow11 write: “Feynman showed that, for a general system, the probability of any observation is constructed from all the possible histories that could have led to that observation. Because of that his method is called the ‘sum over histories’ or ‘alternative histories’ formulation of quantum physics.”

The Positive Wellbeing Criterion and Negative Wellbeing Function The definitions of the positive wellbeing criterion and negative wellbeing criterion can be noted. Because of the nature of the TRUTH domain of problem-solving the wellbeing function conveys the measure of the degree of unity of knowledge attained by complementarities between the good things of life as these are consciously determined by the ontological law. The wellbeing function by its selected variables representing TRUTH also establishes the FALSE domain by avoidance of the mathematical complementation of nullity between TRUTH and FALSE domains of unity of knowledge. The negative wellbeing function conveys the dissociative nature of its entities represented by their characterizing variables. This yields property that signifies methodological independence and individualism. They arise from and further reaffirm the axioms of rationalism and rationality, resource scarcity, competition and conflict. Negative wellbeing can also arise from and reaffirm the properties of the dialectical problem-domain based on the axioms of conflict, competition, resource scarcity, and rationalism. The primal ontological premises of the above two provinces of negative wellbeing and its multivariate spaces, namely methodological independence with individualism, and dialectical conflict with competition are found in rationalism and rationality for every socio-scientific discipline. It is repeatedly necessary to note how the primal ontological origin of the new abstracto-empirical worldview of organic unity of knowledge presents itself. We thereby understand how this foundational ontology is explained by the theory of pervasive complementarities between endogenously existing entitles and their variables. These arise from the foundational text of the ontological law of unity of knowledge.

10 Fitzpatrick 11 Hawking

(2003). and Mlodinow (2010).

26

2 Ontoloical Foundation of the Theory of Economtrics …

Circular Causation or Inter-Causality from the Ontological Core of (, S) To articulate our above fundamental explanation of the primal determining ontology of unity of knowledge as explained in the formal nature of the abstracto-empirical totality of ‘everything’ we proceed by the showing inter-causal implications in Fig. 2.1. It is shown that, the ontological precept of unity of knowledge prevails and washes every part of Fig. 2.1. Deriving knowledge by reference to such laws that enable derivation of unity of knowledge and otherwise, the ontological origin remains permanently as the seat of this precept. The same premise also elaborates on the organic nature of unity by causality and its comprehension, observation and Evoluonary learning process primal ontology

problem-domain

Modeling

Connuity by evolu on of Recalling primal ontology by simulacra { } over knowledge, space, me: repeated simulaons of enes and variables in ( ,S) { ,x( )} Evaluate W(x( )) knowledge-induced problems and issues: Ontological indu on of model & recursive subject to Circular causaon (C.C.) sustainability. x1( ) xi( ) = fi(xj( ), ), i,j=1,2,…,n; i j. ‘ ’ xn( ) =W(x( )). x2( ) All func onal rela ons appear in non-linear form of circular causaon x3 ( ) Between Endogenous Mul variates in Unity of Knowledge { } ( ,S) because of the ‘ ’ indu of the coefficients and the stoch c variables of the evaluated (i.e. esmated and simulated) C.C. equaons. Stascal analysis and policy direcves follow.

Fig. 2.1 Ontological sensitivity of (, S) via {θ} in abstracto-empirical model construction

Circular Causation or Inter-Causality from the Ontological Core of (, S)

27

application in generality and specific problem-domains. The same primal ontological precept leads into the construction of the positive wellbeing (negative wellbeing). This is done by following the same method of translating mutually distinct methodologies that absorb the qualitative and quantitative implications of the ontological law. For positive wellbeing this methodology is organic precept of unity of knowledge. For negative wellbeing the ontology is methodological individualism and independence of organic relations caused by inter-variable exogeneity. Yet the same methodological and methodical approach of unity of knowledge yields both the TRUTH and FALSE nature of the world-system in which a specific problem is studied. In either of these methodological approaches emanating from TRUTH domain by its opposite complementation with the FALSE domain, the ontological premise of (, S),  as primal ontology and ‘S’ as its explicatory mapping to delineate the law of unity of knowledge (TRUTH) oppositely to the laws of FALSE domain remains exogenously permanent. ‘S’ derives specific knowledge flows as ‘θ’-parameter from the -ontological premise unity of knowledge. ‘θ’ is evolved by continuous learning. Thus the entire socio-scientific system is fully washed by ‘θ’ epistemologically derived from  by ‘S’. These together form the primal ontological premise, and is written as the inseparable tuple, (, S).

The Universality of (, S) in Pervasive Consciousness of Unity of Knowledge The continuous and pervasive reference to the primal ontological origin everywhere according to the Tables 2.1, 2.2 and Fig. 2.1 means the instilling of consciousness by evolutionary levels of learning and application in embedding between morality/ethics and materiality. The meaning of consciousness in this phenomenological context of universality of its endogenous nature bestows a subtle meaning to it in terms of moral and material values. In this regard, Kaku12 defines consciousness as follows: “Consciousness is the process of creating a model of the world using multiple feedback loops in various parameters (e.g. in temperatures, space, time, and in relation to others), in order to accomplish a goal (e.g. find mates, food, shelter).” The parameter for describing the significance of the world-system and its sustainability in knowledge, space, and time dimensions that we have shown in terms of the primal ontological awareness most centrally is unity of knowledge and its abstracto-empirical consequences in the nature of ‘everything’.

12 Kaku

(2015).

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2 Ontoloical Foundation of the Theory of Economtrics …

Consciousness Modeled in Econometrics of Inter-Causality Such a phenomenological description of the world-system is summarized by interloping the various parts of the universal system of ‘everything’ in the following econometric modeling: {F(θ, x(θ))} = F[(, S) ∩ {(θ, x(θ))} ∩ {W(θ), x(θ))}]

(2.1)

This generalized functional holds across the entirety of knowledge, space, and time dimensions. Therefore, sustainability of consciousness in all ontic experience.13 Equation 2.1 is explained by, (d/dt)(d/dθ)(F(θ, x(θ)) > 0, for ∀[{θ ∈ (, S)} →f f(x(θ))]

(2.2)

Here the entire functional F(.) comprises higher mathematical transformations defined over {(θ, x(θ)} in time ‘t’.14 The primal ontology of (, S) remains exogenous and induces everyother endogenous category. f(.) denotes all possible transformations of {x(θ)} in the evolutionary classes of {(θ, x(θ))} including their complex order compounding in the sustainable learning processes of unity of knowledge. The rest of the properties of inter-variable circular causation and complete endogeneity of inter-variable organic relations is implied. Similar formalism of the entire problem-domain of FALSE arises from rationalism in mathematical complementation to TRUTH. The FALSE domain is marked by its vicissitude of thought describing the diversity of conflicting world-systems in respect of methodological independence and individualism. The result then is absence of endogenous embedding of consciousness of moral values in all the categories. Such contrariety prevails everywhere in generality and particulars of issues and problems under study.

The Nature of Morality/ethics in Econometrics of Mainstream and Circular Causation Fields The nature of morality and ethics exist in the negative wellbeing case as exogenous parameters. This is the case found in all of mainstream socio-scientific inquiry.15

13 Sherover

(1972). (2019). 15 Dampier (1961). 14 Choudhury

The Nature of Morality/ethics …

29

Exogeneity of moral and ethical emotions is not conscious sign of endogenous values that regulate our thought, lives, actions, and shape the generality and particulars of the world-system automatically. Thus for example, if we treat social expenditure for welfare in the usual form of the econometric model it enters as a separate exogenous variable. This causes independence of the ethical variable from the other economic variables. Thereby, in fiscal expenditure only taxation can cause an expansion of social expenditure. But this reduces other expenditure, thereby resulting in marginal rate of substitution between the social and other expenditure. The effect is thereby conveyed into moral values and material values. Only knowledge-induced consciousness can overcome such marginal rate of substitution between moral and material values of social consciousness. Such motivations require expansion of resources that come about by participatory complementarities) between moral and material values. This result of continuous reproduction of resources is realized by inter-causality between moral and material outcomes in conscious thought and action. This type of resource augmentation for complementary common good can be realized as an example, by realizing dynamic basic needs regimes of development and sustainability.16 Impossibility of treating moral/ethical values as part of complementary inter-variable knowledge-induction, when it remains independent of complementary knowledge-induction with economic variables, is part of the rationality axiom of social choice and rational choice. Such axioms cannot be overcome logically in the pursuit of optimization and steady-state equilibrium objectives. These failures between moral/ethical reality and rationality maximization goals of social and economic science caused impossibility in the ethicist Keynes to solve the moral question in macroeconomic econometric framework.17 It also played its impossibility in overcoming the irrelevant preference concept, whereby minority or weak preferences in voting behaviour are ignored as a neoclassical property of social welfare and social choice18 of majority rule. According to the postulate of irrelevant preferences19 a losing voting for minority population can be rejected by winning by the stronger side despite any moral connotation irrelevant preferences may hold exogenously. Contrarily, to introduce moral/ethical values a coalition between all categories of voters with diverse preferences and goals must be allowed in a participatory democratic framework of voting. This allows for knowledge-induced positive complementarities while avoiding conflicting and opposing preferences. In treating moral/ethical values exogenously in the econometric model, it is illogical to have such values depend on knowledge as of the ontological premise of unity of knowledge. The

16 Streeten

(1958) and Todaro (1977). (1989). 18 Arrow (1951). 19 Stanford Encyclopedia of Philosophy (Oct 14, 2014). “Arrow’s Theorem”. 17 O’Donnell

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2 Ontoloical Foundation of the Theory of Economtrics …

results of such ethical constrictions in mainstream economic theory are the postulates of optimization and technically attaining of steady-state equilibrium. Such technical properties are upheld even though they do not represent social, economic, and scientific reality.20

Econometric Concerns Underlying Circular Causation Theory Versus Mainstream Economic Theory With increasing reduction of fiscal policy effects on market transformation, government policy intervention reduces; market activities increase. Consequently, autonomous government expenditure, GA , is replaced by conscious household increasing spending, say (S(Y)), as an ethical duty. Taxation (T(Y)) is reduced in the face privatization by market forces. These transformations into market process with moral/ethical consciousness further enhanced by the force of learning by {θ}effect, generates complementary relations between moral/ethical consciousness and market activity variables existing in inter-causality of unity of knowledge. That is, moral/ethical and market activity embedding increases with the increase in evolutionary knowledge regarding complementarities according to the intrinsic law of unity of knowledge. Thereby, S(Y)↑ with T(Y)↓and vice-a-versa, as the exogenous ethicality of government policy intervention reduces in the face of increasing endogenous consciousness by the moral/ethical embedding with market activity as {θ}↑. Now the market transformation is heightened with the evolutionary learning effect of {θ} on the circular causation relations marked by, Y(θ) = f1 (S(Y(θ)/T(Y(θ)), θ)

(2.3)

(Y(θ))/T(Y(θ)) = f2 (Y(θ), θ)

(2.4)

S(Y(θ))/T(Y(θ)) = f2 (Y(θ), θ

(2.5)

θ = f(Y(θ), S(Y(θ)/T(Y(θ)))

(2.6)

implying,

The expected signs of the knowledge-induced coefficients and thereby the intercorrelations are shown to be positive. ‘θ’-parameter appears in every equation to mean progressive learning by complementarities between the variables as the ontological induction of unity of knowledge. 20 Shackle

(1972) and Hull (1988).

Econometric Concerns Underlying Circular Causation Theory …

31

The above circular causation relations arise by virtue of the complete endogeneity between the variables, as represented by expression (2.6).The wellbeing function in the variables in positive complementarities represented by their positive inter-correlation coefficients is signified by Eq. (2.6). The underlying implication of the above econometric formulation is that, it is not the government and intensive institutional imposition that attain moral/ethical consciousness. Rather, it is the self-actualization of embedded moral values in materiality that effectively realizes consciousness as an evolutionary learning process. Such evolutionary learning processes maintain sustainability in knowledge, space, and time dimensions. The continuity over time is implicit. The conventional form of the econometric model corresponding to the above specification is differently conceptualized and applied. Government expenditure variable, GA , autonomously determined, is a critical variable that drives the income multiplier. Fiscal policy is determined by, (T(Y)-G), which can be positive when net surplus general revenue occurs to the benefit of government in financing GA . When the fiscal balance is negative, government expenditure exceeds tax revenue, thus causing deficit. Government fiscal policy fluctuates between these two ends causing marginal rate of substitution between fiscal austerity and fiscal expansion. The resulting exogenous ethics by government and institutional fiscal decision is unlike the endogenous case of market absorption of conscious household spending attitude. In that case (T(Y)-G)↓ identically. Furthermore, Y = C(Y) + I(Y) + GA

(2.7)

C(Y, W) = a + b.Yd + c.W(Yd ),

(2.8)

with Yd denoting disposable income; W(.) denoting wealth.21 I(Y, W, r, i) = g0 + g1 .Yd + g2 .W(Yd ) + g3 .(r/i)

(2.9)

G = GA , autonomous government expenditure   T(Y, W) − GA

(2.10)

21 Wealth variable in the intertemporal consumption function arises from the life-cycle hypothesis of consumption and savings. It is also found in the permanent income hypothesis divided between permanent income (Yd ) and transitory income (wealth as determined by returns in stocks, shares, and bonds). In the formalism of present valuation of future streams of various cash-flows we have, C(Y) = (CP (YP ) + CT (YT )) = t N [C(Y)/(1 + r)t ]. CP (YP ) denotes permanent consumption based on permanent income YP . CT (YT ) denotes transitory consumption based on transitory income, YT . Y = TP + YT . ‘r’ denotes time-preference rate. ‘i’ denotes interest rate. Investment expenditure, I(Y, W, r/i) can be expressed similarly in terms of Y. Furthermore, ‘r’ and ‘i’ can be specified in terms of ‘P and ‘T’. This is not shown here. An example is to invest in risk-free assets (IT (YT , W, r/i), and market-risky assets (IP (YP , W, r/i)). I(Y,W,r/i) = (IP (YP , W, r/i)) + (IT (YT , W, r/i).

32

2 Ontoloical Foundation of the Theory of Economtrics …

is positive or negative for surplus or deficit in general revenue, respectively. When Eqs. (2.8)–(2.10) are inserted in Eq. (2.7) we obtain the resulting expenditure sector equation in the form, Yd = A + B.W + C.(r/i) + D.GA     Here, A = a + g0 / 1 − b − g1     B = c + g2 / 1 − b − g1   C = g3 / 1 − b − g1   D = 1/ 1 − b − g1

(2.11)

Now unless (r/i) and GA are taken as exogenous variables or parametric in nature and r < i, so that the coefficients C < 0, with marginal propensity to consume and marginal propensity to invest adding up to less than or equal to 1, there cannot be a negative sloped expenditure sector curve. A positively sloped expenditure curve will imply that a general macroeconomic equilibrium does not exist. We can prove this case furthermore by considering the liquidity-money (LM) curve of the monetary sector: Quantity of money, M = l0 + l1 .Y + l2 .W + l3 .(r/i)

(2.12)

l3 > 0, because of the positive effect of (r/i) caused by r < i. That is increasing ‘i’ causes higher supply of money. l0 , l1 , l2 are each positive coefficient. The net result is a positively sloped monetary sector curve, the LM-curve. We then have both a positively sloped expenditure sector curve and a positively sloped monetary sector curve. With the exogenous effects of (r/i) and W(.) on the expenditure sector curve and the monetary sector curve the effects on the general macroeconomic equilibrium cannot be determined precisely. This indeterminacy of equilibrium in Keynesian general macroeconomic equilibrium model is caused by unpredictable relations between (r/i) and real output. This consequence points to the impossibility of monetary and fiscal, private and public sector policies to be well determined. The expressions (2.7)–(2.11) are linearly independent between the variables as shown. Thereby, relational functions between the variables cannot be shown as in circular causation between them. There is no effect of the critical learning parameter inducing all the variables, thus explaining the details of the policy-theoretic consequences. The accounting nature of the general macroeconomic equilibrium cannot explain the relational aspect of the wellbeing objective criterion. This is not to say that Keynes did not think of evolutionary equilibrium under the impact of policy and market forces while moving under-employment equilibrium real income towards full-employment level of real income at stable price-level.22 Rather, the underlying problem in Keynesian idea of general equilibrium is caused by the problem of how the economic universe is determined in the face of its probabilistic 22 Dimand

(2017) and Clark (1915).

Econometric Concerns Underlying Circular Causation Theory …

33

randomness.23 Keynes finally had to render this problem by assuming the postulates of economic rationality of human behaviour. Thus, the ontological roots of Keynes’ thought rests on randomness of knowledge causing uncertainty. Keynes resolves this akin to the neoclassical form of axioms of economic rationality. This approach is contrary to the a priori ontological premise of unity of knowledge and its relations with the generality and particularities of the world-system in the problem-domain. Similar ideas on evolutionary equilibrium were offered by the Austrian School of Economics.24 Like circular causation, the theory of cumulative social causation was advanced by Myrdal.25 The limitations of these formulations on evolutionary economic thought are the lack of analytical explanatory model, the explicit use of knowledge-induction, and the prevalence of exogenous variables that reflect suppressed transformation into the much desired ethically induced market process. The works by Robinson26 and Nelson and Winter27 are of the neoclassical genre. They therefore cannot explain inter-variable causation, and circular causation away from dialectical process theory or in explicit analytics of evolutionary learning, respectively.28

Generalized Economic Evolutionary Equilibrium Caused by Circular Causation The general equilibrium formulation in terms of circular causation between the ‘θ’induced variables of wellbeing function is the evaluation system shown in Fig. 2.1. It takes the following form between the list of endogenous variables, x(θ) = {Y, W, r/I, C, I, T, S, M, θ}[θ]: Evaluate the moral-material complementarity in the wellbeing function, Evaluate{ θ,x(θ)} W (x(θ ))

(2.13)

Subject to the inter-variable circular causation (C.C) non-linear logarithmic relations (f’s). Non-linearity is due to the induction of both variables and coefficients and their complexly compounded transformations by θ-parameter in continuous simulations: Y(θ) = f1 (W, r/I, C, I, T, S, M, θ)[θ]

23 Lawson

and Pesaran (2009). (1990) and Cantner et al. (2009). 25 Toner (1999). 26 Burstein (1991). 27 Nelson and Winter (1985). 28 Sztompka (1991). 24 Hayek

(2.14)

34

2 Ontoloical Foundation of the Theory of Economtrics …

W(θ) = f2 (Y, r/I, C, I, T, S, M, θ)[θ]

(2.15)

(r/i)(θ) = f3 (Y, W, C, I, T, S, M, θ)[θ]

(2.16)

C(θ) = f4 (Y, W, r/I, I, T, S, M, θ)[θ]

(2.17)

I(θ) = f5 (Y, W, r/I, C, T, S, M, θ)[θ]

(2.18)

T(θ = f6 (Y, W, r/I, C, I, S, M, θ)[θ]

(2.19)

S(θ) = f7 (Y, W, r/I, C, I, T, M, θ)[θ]

(2.20)

S as spending variable is replacement for the exogenous GA -variable. M(θ) = f7 (Y, W, r/I, C, I, T, S, θ)[θ] θ = f8 (Y, W, r/I, C, I, T, S, M)[θ]

(2.21)

The recurrent appearance of ‘θ’-parameter in the induced variables and functions imply continuous evolutionary learning process over knowledge, space, time (implicit) dimensions. The system of CC relations applies to time series data, survey data, and meso-data as a combination of time-series and survey data, microeconomic and macroeconomic aggregate data formed by microeconomic data via preference aggregation. The generalized evolutionary equilibrium values of the evaluated (estimated and simulated) variables comprise a specific state of the evolutionary equilibrium solution that is subject to further simulated values with new sets of data and policy-driven alternatives, and so on. A specific policy-driven case is inferable from the relationship between S↑ and T↓ and the resulting effect on the quantity of money, M↑, and monetary policy, (dM/dθ) > 0. This result agrees with Friedman’s29 analysis that, with deepening market transformation and thereby decreasing government policing of the economy, monetary policy gains impact at the replacement of fiscal policy. Thereby, with the full impact of spending ‘S’↑, complementary expansionary monetary policy becomes fully effective in market transformation. Furthermore, with monetary policy being defined under θ-impact, the positive complementary relationship between market transformation and expansionary monetary policy is inter-causally reinforced by the deepening ethical household and institutional preferences. In all such consciously sustained economic transformations governments become discursive participants with the microeconomic socioeconomic agents. Thus the full agent-specific complementary preferences in the ethically induced conscious economic transformation are the interactively integrated and evolutionary 29 Friedman

(1960, 1989).

Generalized Economic Evolutionary Equilibrium Caused …

35

joint preferences of all. For example, if℘ h denotes household preferences; ℘ In denotes institutional preferences; ℘ G denotes government preferences as participant, then the complementary unified preference at large is denoted by, ℘ = ∪interaction ∩integration [{℘h } ⊗ {℘In } ⊗ {℘G }][θ ]

(22)

Thus there are specific solutions for the evolutionary equilibrium vectors as the coefficients get re-selected with policy alternatives. Thereby, a learning-by-doing experience is generated over completed processes of interaction, integration, and evolutionary learning. This happens in the light of realizing better wellbeing results that are conformable with the ontology of unity of knowledge implied by complementarities between the variables representing the good things of life as advocated, and rejecting the bad things of life that are contrary to wellbeing. In this respect of policy and morally/ethically directed choices of simulated coefficients the method of Spatial Domain Analysis (SDA) can be used.30 There are also other econometric methods suitable for evaluating circular causation for wellbeing function as found fitting for ontological relevance of unity of knowledge. The wellbeing function makes this selection via complementarity between the good things of life (TRUTH) and rejecting the bad ones (FALSE).

Preferences in Micro-Foundation of Macroeconomics An important inference derived from the above nature of preferences is that ethicized preferences are central to economy-wide decision-making. Therefore, macroeconomics needs to be reformulated in reference to microeconomic foundations with the organically relational concept of dynamic preferences, variables, and their intercausal functional relations, all induced by ‘θ’. This approach though is different from the theory of micro-foundation of macroeconomics.31 The same reason exists for this impossibility: There is no endogenous theory of ethics that is embedded in microeconomics to convey its relevance at the level of macroeconomic reformulation by microeconomics in terms of the analytical ethical theory of decision-making. The inter-causal complementary relationships between ‘θ’, money, spending, and the other variables shown in the x(θ)-vector of variables yield many other endogenous policy results in the pure market context.32 Deepening effectiveness of expansionary monetary policy in market transformation, which is further enhanced by ethical consciousness of positive complementary inter-causal linkages means increasing spending absorption of C+I. Y therefore increases. Increase in W(.) responds. Tax rates decline. The circular causation effects continue into sustainability.

30 Goodchild

(1987). (2009). 32 Yeager (1997). 31 Horwitz

36

2 Ontoloical Foundation of the Theory of Economtrics …

In the end, the joint effects of all inter-variable circular causation can be solely defined by the dynamics of inducing ‘θ’-parameter. Because of the interactive, integrative, and evolutionary property of ‘θ’-induction over all. The shapes of the expenditure curve and LM curve of Keynesian and Hicks formulation cannot be expected. For instance, fiscal policy and monetary policy are not complementary in mainstream macroeconomics for sustaining non-inflationary economic growth. Yet in the case of econometrics of circular causation in the wellbeing function, increasing spending replacing government expenditure and being related to expansionary monetary policy, remain complementary. This signifies the ontological effect of unity of knowledge in the formulation of microeconomic foundations of macroeconomics.

Conclusion The philosophical underpinning of the substantive differences between the econometrics of circular causation and the conventional postulates of econometrics is based on how the observer and analyst view the specific problem-domains of the worldsystem. Even though in all cases the ontological nature of the world-system is seen to be probabilistic, yet in the case of conventional econometrics this feature is unresolvable. The result of such irresolution of the information collected in mainstream econometric modeling is imprecise. That is because, being encapsulated in the probabilistic sense,the axiom of economic rationality must be assumed.Along with the axiom of economic rationality the ontological premise of rationalism also runs course by putting a priori knowledge to remain within the bounds of human perception. Yet human perception is like mind without memory, as it gets denuded of the a priori ontological law of oneness expressed by unity of knowledge. Economic rationality and a posteriori rationalism, as of Keynes’, cast away the subtle reality of social inclusiveness, moral/ethical endogeneity, religious and cultural dynamics. This happened despite Keynes’ wish to make economics as the handmaiden of ethics. Indeed, Keynes was influenced by Moore’s ethical worldview, but disagreed with metaphysical ethics, and endogenous morality.33 The totality of existential reality is ruptured and decapitated from a system study of reality in its holism. In the econometrics of circular causation, the a priori ontological origin of knowledge is made to integrate with the a posteriori knowledge of the sensate world-system. Thereby, the integration between a priori and a posteriori knowledge of total unified reality captured within soul, mind, and matter remains essential. This essence of organically unified reality takes up qualitative and quantitative forms simultaneously in the embedded study of social and economic events. Philosophical abstraction is thus subjected to the phenomenology of quantitative evaluation. Vice-a-versa, the study of such moral-material events in the phenomenological realm recursively feeds back into the a priori-a posteriori unified ontological worldview. Such a process of recursive cause and effect in continuity of knowledge, 33 Moore

(1903).

Conclusion

37

space, and time forms the genre of reproduction of unity of knowledge and its consequences in the circular causation between endogenously interrelated systems of variables. Thus on integrating the qualitative and quantitative, a priori and a posteriori, moral/ethical and material sensate in econometric modeling, the circular causation method of evaluating wellbeing gives a holistic understanding of economic reality with its moral/ethical social inclusiveness. The degree of predictability intensifies by being able to read events close to their points of occurrence by the evolutionary progress of knowledge, even though a decreasing degree of stochastic uncertainty remains. Indeed, this gap in perfection capacitates creative learning in sustainable continuity of knowledge, space, and time.

References Arrow, K. J. (1951). Social choice and individual values. New York, NY: Wiley. Burstein, M. (1991). History versus Equilibrium: Joan Robinson and Time in Economics. In I. H. Rima (Ed.), The Joan Robinson Legacy (pp. 49–61). Armonk, New York: M.E. Sharpe Inc. Cantner, U. L., Gaffard, J., & Nesta, L. (Eds.). (2009). Schumpeterian Perspectives on Innovation, Competition, and Growth. New York, NY: Springer Verlag. Choudhury, M.A. (2010). A neurocybernetic theory of management system. In A .Gunasekaran & M. Sandhu (Eds.), Handbook on business information systems. Singapore: World Scientific Publications. Choudhury, M. A. (2019). Meta-science of Tawhid, a theory of oneness, forthcoming. New York, NY: New Palgrave & SpringerNature. Choudhury, M. A. (2019). The Tawhidi methodological worldview a transdisciplinary study of Islamic economics. Springer. Choudhury, M. A., & Hossain, M. S. H. (2010). Neuro-cybernetics of socio-scientific systems. Mind and Society, 9, 2. Clark, J. M. (1915). Cumulative effects of changes in aggregate spending as illustrated by Public Works. Amereican Economic Review, 25, 14–20. Dampier, W. C. (1961). A history of science and its relations with philosophy and religion. Cambridge, England: Cambridge University Press. Fitzpatrick, T. (2003). Postmodernism and new directions. In P. Alcock, A. Erskine, & M. May (Eds.), Social policy (pp. 125–133). Oxford, Eng: Blackwell. Friedman, M. (1960).A program for monetary stability, Fordham University Press, New York, NY. Friedman, M. (1989). Quantity theory of money. In New Palgrave: Money (pp. 1–40). New York, NY: W.W. Norton. Ghazzali A. H. [Imam] trans. Marmura, M. E. (1997). The Incoherence of the philosophers, Brigham Young University Press, Provo, Utah. Also see, Ghazali A. H. [Imam] trans. Buchman (1998). The niche of lights. Provo, Utah: Brigham Young University. Goodchild, M. F. (1987). A spatial analytical perspective on geographical information systems. International Journal of Geographical Information Systems., 1(4), 327–344. Gruber, T. R. (1993). A translation approach to portable ontology specifications. In Knowledge Systems Lab, Technical Report KSL 92–71, Stanford University Computer Science Department. Hawking, S. W., & Mlodinow, L. (2010). Alternative histories. In The grand design (pp. 80, 82). London, England: Transworld Publishers. Hayek, F. A. (1990).reprint. The use of knowledge in society. In M. C. Spechler (Ed.), Perspectives in economic thought (pp. 183–200). New York, NY: McGraw-Hill. Horwitz, S. (2009). Microfoundations and macroeconomics: An Austrian perspective. London, England: Routledge.

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Hull, D. L. (1988). Science as a process, an evolutionary account of the social and conceptual development of science. Chicago, IL: University of Chicago Press. Kaku, M. (2015). Consciousness—A physicist’s viewpoint. In The future of the mind, Chapter 2. New York, NY: Anchor Book. Lawson, T., & Pesaran, H. (2009). Keynes’ economics. Routledge, London, England: Methodological Issues. Moore, G. E. (1903). Principia ethica. Cambridge, England: Cambridge University Press. Nelson, R. R., & Winter, S. G. (1985). An evolutionary theory of economic changeUSA, MA: Belknap Press of Harvard University Press, Cambridge. O’Donnell, R. M. (1989). Keynes: Philosophy, economics and politics. London, Eng: Macmillan Press Ltd. R.W. Dimand (online version). “What Keynesian revolution? a reconsideration seventy years after the general theory”, https://economie.esg.uqam.ca/wp-content/uploads/sites/54/2017/09/ Dimand.pdf Sen, A. (1988). Conduct, ethics and economics. In On ethics & economics (pp. 88–89). Oxford, UK: Basil Blackwell. Shackle, G. L. S. (1972). Epistemics and economics . A critique of economic doctrines. Cambridge, England: Cambridge University Press. Sherover, C. M. (1972). Heidegger. Bloomington, IN: Kant and Time Indiana University Press. Streeten, P. (Ed.) .(1958). Value in social theory, a selection of essays on methodology by Gunnar Myrdal (pp. 198–205). New York, NY: Harper & Brothers Publishers. Streeten, P. (1981). From growth to basic needs. In P. Streeten (Ed.), Development perspectives. New York, NY: St. Martin’s Press. Sztompka, P. (1991). Society in action. In The theory of social becoming. Chicago, IL: The University of Chicago Press. Todaro, M. P. (1977). The meaning of development. In Economic development in the third world (pp. 50–68). New York, NY: Longman. Toner, P. (1999). Gunnar Myrdal (1898–1987): Circular and cumulative causation as the methodology of the social sciences. In Main currents in cumulative causation, the dynamics of growth and development, Chapter 5. Houndmills, Hampshire: Macmillan Press Ltd. Yeager, L.B. (1997). The fluttering veil, essays on monetary disequilibrium. Indianapolis, IN: The Liberty Press.

Chapter 3

Profit-Sharing Versus Interest Rate in Islamic Economics as Mesoscience

Abstract Islamic economics is a field of mesoscience. What is mesoscience and meso-economics within it? The following excerpts will explain the underlying meaning: “Mesoscience implies there are some underlying principles that can unify different disciplines, and all disciplines may be involved in contributing available disciplinarily specific knowledge at corresponding levels to revealing common principles for meso-scales at all levels. A small change in the angle to view old problems could lead to a big progress in solving them.” [Springer Nature, Engineering (2019). “What is meso-science or mesoscience?” Switzerland.] “Mesoscale herewith refers to a range of scale in between the micro- (element) scale and the macro(system) scale and, within this range of scale, a characteristic structure exists, namely meso-structure, featuring dynamic heterogeneity in space and time, which is critical to the performance of the system. Parameters at the mesoscale are needed to bridge the mechanism at the element scale to the behavior of the system. The objective of mesoscience is to develop a principle as general as possible to make such a bridge for different levels of disciplines…..” [Huang, W. Li, J. & Edwards, P. (2018). “Mesoscience: exploring the common principle at mesoscales”, Natural Science Review, 5:3, pp. 321–326.] Islamic economics as a scientific field of inquiry embodies in it the moral and material endogenous embedding in the light of the primal ontological law of monotheism conveying unity of knowledge. The mesoscience of this methodological worldview is explained by pervasive complementarities, participation, and symbiotic interrelations between the variables representing the good things of life in the wellbeing criterion cogently explained. The following definition is thereby adopted: “Islamic Economics is neither a microeconomic nor a macroeconomic study framed in these mainstream dichotomies. The moral and ethical foundation of Islamic economics emerges from the possibility of symbiotic inter-causality at the mesoscales of methodology, behaviour, applications, and continuity. Integrated together by methodological abstraction and applications, the resulting mesoscale phenomenological study presents a distinctive methodological worldview of organic unity of knowledge. In the qur’anic terminology this monotheistic worldview is referred to as Tawhid, the universal Law of unity of knowledge in ‘everything’.” [Choudhury, M.A. (2012). “The ‘Tawhidi’ Precept in Science”, in Muzaffar Iqbal (ed.)Studies in the Islam and Science Nexus Volume I, Ashgate, © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2020 M. A. Choudhury, Islamic Economics as Mesoscience, https://doi.org/10.1007/978-981-15-6054-5_3

39

40

3 Profit-Sharing Versus Interest Rate in Islamic …

London, Eng.] In regard to its mesoscientific nature, Islamic economics is formally rendered in regards to the endogenous interrelationship between moral values and the legal injunctions that are derived from the Qur’an and the guidance of the Prophet Muhammad (sunnah). These two essences of formalism premise mesoscientific reasoning in the foundational ontological origins of its methodology. The emergent methodology is of the law of oneness explained by symbiotic unity of knowledge of monotheistic oneness. This primal ontology of Islamic economics makes this field a study in participatory endogenous relations in evolutionary learning dynamics of the inter-variable, transdisciplinary, and moral-material interaction and integration as processes of evolutionary learning by inter-causal relations between the variables of the wellbeing criterion. This process, analytical in nature, leads to formulating how the primal monotheistic methodology establishes the emergent analytical method of evaluation (estimation and simulation) of the wellbeing function. This is the formal criterion that explains the endogenous, that is pervasively complementary and participatory inter-causal relations between the multivariate vector of the wellbeing criterion. Islamic economics in this meso-economic category is a vastly interactive field of socio-scientific inquiry. This approach essentially involves moral values and their explained, analytical, conceptual, and quantitative organic embedding of material values by the full study of the wellbeing function. One of the arguments and the theory propounded in Islamic economics is to formalize the principle of avoidance of interest rate (riba) and its replacement by trade. This is a cardinal qur’anic principle. The profit-sharing rate via trade and exchange in the good things of life is provided as the inviolable replacement. The emergent symbiotic relationship between trade and the real economy in the midst of phasing out the rate of interest is shown to be actualized by the force of consciousness of belief causing reasoning by knowledge to induce the process of phasing out interest rate by the profit-sharing rate in an ethicizing market venue. The formal model underlying the phasing out of interest rate and its replacement by the rate of profit as the manifestation of deepening trade is an extensively mesoscientific undertaking. It concerns the ontological conceptualization as methodology leading into the evaluative method of a formalized wellbeing function. This formalism arises from the ontological premise of the fully endogenous participative nature of inter-variable feedback. The vector of selected variables results in multivariate inter-causal relations. Such interrelations take the form of recursive feedback in the light of their endogenous relations linked with the evaluation of the wellbeing function. The wellbeing criterion is ontologically derived from the formalism and dynamics derived from the ontological foundation of the organic unity of knowledge of the monotheistic law (Tawhid). This paper will firstly delineate the methodological theory that emanates from the ontological premise of monotheistic law of unity of knowledge (Tawhid) in the Qur’an and is epistemologically mapped by the prophetic guidance (sunnah) into the world-system. Next, the emergent methodology will be shown to lead to the formulation of the wellbeing criterion, which is evaluated by inter-variable circular causation relations expressed as equations. The emergent model of evaluation of wellbeing criterion with its inter-variable circular causation relations forms the resulting formal meso-economic perspective. The empirical problem of inverse relationship between profit-sharing rate and interest

3 Profit-Sharing Versus Interest Rate in Islamic …

41

rate (riba) is thereby studied by Islamic financial data from Islamic banks in Malaysia. Pertinent conclusion is then made on the evidence of moral-material endogeneity of the problem of phasing out interest rate by profit-sharing rate by trade in the good things of life for attaining evolutionary learning evaluation of wellbeing substantively defined as a multi-systemic, multivariate evolutionary learning dynamic model premised on monotheistic organism of unity of knowledge.

Introduction Profit sharing and its coterminous elements of interest avoidance and its replacement by profit-sharing instruments are neither necessary nor sufficient groundwork of Islamic ethical and socially inclusive financing. This can be proved analytically considering the essentials of the qur’anic precepts of moral and material embedding by means of the foundational principle of Tawhid. Tawhid means monotheistic oneness as the qur’anic law bestowed to the generality and particularity of the universe. The analytical proof is derived by invoking the ontological primacy of the Qur’an as the foundational universal law of unity of knowledge. Such a concept of unity of knowledge is explained by the qur’anic worldview of organismic complementarities (Qur’an 36:36) between the system of the good things of life and their sustainability by virtue of the knowledge-induced learning world-system (Qur’an 13:1-5). The proof regarding the insufficiency of the long-held belief among Islamic scholars on the avoidance of interest and its replacement by certain named financial instruments by the traditional prevalence of the meaning of Islamic Law as the jurisprudence of shari’ah is debated on qur’anic and analytical grounds in this paper. The implication is thereby broader than what has been upheld by shari’ah scholars and so-called ‘Islamic economics and finance’ in its blatant belief on profitsharing as they understand it as the substitute for riba-concept and riba-financing. The qur’anic precept and its ineluctable Tawhidi meaning of organic unity of knowledge, as between trade, riba, profit-sharing, and debt-financing has not been recognized. Thereby, the underlying methodology and method of circular causation between the multivariates in the Islamic objective criterion of the wellbeing function (maslaha) has not been invoked to understand the organic meaning of unity of knowledge that emanates and functions in respect of the law of Tawhid in such an emergent methodology and method. Consequently, the ideas of profit-sharing, trade, riba, and debt remain questionable in contradistinction to the underlying meaning in the Qur’an (2:275, 265–281) in respect of the holistic system view of morality/ethics, commerce, and sustainability that is bestowed. The formula for profit-sharing (℘ i ) of the ith partner used by Islamic economists, shari’ah scholars, and Islamic financial institutions is this: ℘ i = πi /π, with ‘i’ denoting sharing partners in the total profit of the conglomerate (π) in proportion to their individual profits (πi ), i = 1,2,…,n.

42

3 Profit-Sharing Versus Interest Rate in Islamic …

n Thereby, the average profit-sharing rate is denoted by, ℘ = (1/n)Σi=1 ℘i = π/n. In this sense of lateral aggregation of the profit-sharing rates to obtain the average profit-sharing rate, no demand is made on the interaction and thereby interactively generated integration between the profit-sharing rates. The implication of independence between the rates also implies the same nature of lateral independence to partners by such an additive nature of the agents and the rates as variables. The implication of lateral independence is extended to the similar nature of preference formation in institutions of profit-sharing.

Contrasting Mainstream Islamic Economics with the Tawhidi Methodological Worldview Next we compare the meanings of the lateral independence of the terms of average profit-sharing rates and thereby of the participants and their institutions in respect of the theory of riba (interest). The Qur’an (59:7)1 declares sharing as a participatory dynamic of distribution resulting by and in inter-causality of the multitude systemic dynamics. Profit-sharing contrary to riba is an instrument of attaining and sustaining in such a system of interactive integration of sharing and progressing into higher levels of piety and progress therein. Profit-sharing contrary to riba must thereby reflect its negation of the lateral addition method in computation, which thereby reflects lateral independence between participants and their institutions covering society as a whole. Organic learning of unity of knowledge is thus negated between these various elements of moral and social inclusiveness that the Qur’an invokes in its meaning of resources and their integrative distribution. Riba is a financing instrument that exists in exclusive aspect of resource allocation with the real and learning economy by virtue of the principle of unity of knowledge in the evolutionary learning field. Let us understand this point. Wealth as resource is maximized for profit in the neoclassical economics of marginal rate of substitution by making the financial economy and the real economy as marginalist ways to allocate wealth. Thus the marginal rate of substitution between the financial sector that yields riba and the real economy sector that yields economic yields causes these sectors to be independently competing ones. Resources flow in mutually exclusive ways either to one or the other sector causing competition, marginalism, and lateral independence of relationship between them. This phenomenon is a permanent attribute of the neoclassical perspective of marginalist yields between the two sectors. The financial sector yields riba (i); the real sector yields economic returns(r). ‘i’ is the yield on financial transactions of monetary resource as wealth. ‘r’ is the return on the prices 1 Qur’an

(59:7): What Allah has bestowed on His Messenger (and taken away) from the people of the townships,-belongs to Allah,-to His Messenger and to kindred and orphans, the needy and the wayfarer; In order that it may not (merely) make a circuit between the wealthy among you. So take what the Messenger assigns to you, and deny yourselves that which he withholds from you. And fear Allah; for Allah is strict in Punishment.

Contrasting Mainstream Islamic Economics …

43

of real economic transactions where profits are generated by the price, output, and quality of real transactions. The resulting smooth surface of optimal allocation of wealth as resource is explained by the marginal rate of substitution between the real sector (R) and the financial sector (F). These sectors generate their sectoral incentive by their relative yields. This is shown by the formula of marginal rate of substitution, −dR/dF = i/r. This formula on sectoral yields is benign of inter-sectoral learning by interaction and integration and evolution that would be otherwise caused by flows between the two sectors, causing inter-sectoral flows of resources to occur and be sustained. To allow for such evolutionary learning between R and F along the optimal allocation surface of F and R and along the expansion path of (R, F) inter-causal relations is impossible in the neoclassical sense of optimality. Evolutionary learning by inter-causal organic relations between R and F causes the neoclassical type optimal surface and thus optimal allocation of wealth as resource to be impossible for conception and measurement. Thus in the face of lateral sectoral independence the profit-sharing rate in the real economic sector remains a marginal substitute with the financial sector and vicea-versa. This result proves the case that, the pursuit of so-called ‘Islamic economics’ in the mainstream economic garb treats the notion of profit-sharing rate just as a ribacategory according to the lateral independence characteristic of neoclassical theory of wealth as resource allocation between R and F. Next, let us understand what the profit-sharing rate as legitimate replacement of riba would mean in the qur’anic meaning of trade as exchange. The Tawhidi methodology contrary to the shari’ah meaning of profit-sharing as promoted by shari’ah scholars and Islamic economists in general, explained above, is that of organic unity of knowledge between multivariates that together explain the intercausality of such variables with the profit-sharing rate.

Formalism Thus, let the vector of knowledge-induced (θ) vector of variables be denoted by {℘, (r/i), R, F, R/D, θ}[θ]. The Tawhidi organic interrelationship is methodologically introduced in the form of unity of knowledge denoted by ‘θ’ inducing commonly all the variables as evolutionary learning categories. The variables are constructed in the form of their acceptable choices as the good things that would interrelate expectedly with positive correlations and coefficients between them. Analytical results and policy conclusions can thereby be drawn. The presence of ‘θ’ inducing all the variables signifies the degree to which complementarities as evolutionary learning can be estimated and simulation possibility done in the system of inter-causal equations between the endogenous variables. In the especial case of determining the profit sharing rate in this case of inter-causal relations between the variables as the organic meaning of evolutionary learning in terms of unity of knowledge by ‘θ’, the corresponding equation is,

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3 Profit-Sharing Versus Interest Rate in Islamic …

℘ (θ) = f((r/i), R, F, R/D, θ)[θ]

(3.1)

In the whole vector of endogenously related inter-causal variables, while ℘(θ) is so defined, there are also the reverse causality between ℘(θ) and the other variables. This makes the entire endogenous system of circular causation relations to be fully explanatory in the determination of ℘(θ) and the other variables. We thereby write the whole system of endogenous inter-variable circular causal relations as, ℘ (θ) = f1 ((r/i), R, F, R/D, θ)[θ]

(3.2)

(r/i)(θ) = f2 (℘, R, F, R/D, θ)[θ]

(3.3)

R(θ) = f3 (℘, r/I, F, R/D, θ)[θ]

(3.4)

F(θ) = f4 (℘, r/I, R, R/D, θ)[θ]

(3.5)

(R/D)(θ) = f5 (℘, r/I, R, F, θ)[θ]

(3.6)

The last of the circularly related inter-causal equations is, θ = f6 (℘, r/I, R, F, R/D)[θ]

(3.7)

Equation (3.7) means that θ-values are generated parametrically in relation to some form of averaging between the other variables as an indicator of complementarities between the variables. The methods deriving such parametric values in all cases—of time series, cross-sectional and meso-data are shown in the actual empirical work. Because ‘θ’ denotes knowledge as the indicator of wellbeing, it therefore represents a simplified version of the wellbeing function in the Tawhidi sense of degrees of estimated unity of knowledge and the simulation possibility gained thereby along the evolutionary learning path of new sets of θ-values over knowledge, space, and time dimensions. The system of endogenously related variables in the circular causal relations (3.1–3.7) needs to be evaluated together. The results on the signs of coefficients and the degrees of inter-correlation thereby determine the causes and effects, and the degrees of inter-variable complementarities required for a simultaneous and sustained evolution of such relations. The methodology of Tawhidi law of organic unity of knowledge is thus invoked as the methodology implemented by the evaluation method used for the system of Eqs. (3.1–3.7). By means of this explanatory analytical system of evaluated equations the definition and quantitative measure of the profit-sharing rate contra riba is determined as an organic relational indicator. The shari’ah invoked methodology and method of lateral independence between the variables is replaced by Tawhid as the law of intrinsic pairing (complementarities by unity of knowledge, Qur’an 36:36).

Formalism

45

It is expected of the coefficients of the log-linear transform of the system of Eqs. (3.1–3.7) by estimation or simulation to have positive signs and positive correlations. This is the same as the inter-variables having positive partial elasticity coefficients (∈ij , i, j = 1.2…), as shown below: ℘ (θ ) (r /i) R + + + ℘ (θ) 1 ∈12 ∈13 (r /i) ∈21 1 ∈23 R ∈31 ∈32 1 F ∈41 ∈42 ∈43 R/D ∈51 ∈52 ∈53 θ ∈61 ∈62 ∈63

F + ∈14 ∈24 ∈33 1 ∈54 ∈64

R/D + ∈15 ∈25 ∈34 ∈44 1 ∈64

θ + ∈16 ∈26 ∈35 ∈45 ∈55 1

(3.8)

Expression (3.8) and thereby the system of Eqs. (3.1–3.7) have important empirical implications of inter-variable endogenous circular causation relations. For instance, ∈12 > 0 implies that, profit-sharing rate is monotonically related to (r/i). This in turn means that real returns increase (decrease) corresponding to riba-rate decreasing (increasing). Likewise, as R and F correlate positively so also they contribute positively to profit-sharing rate. The positive relation of such a trend to (r/i) is thereby inferred. The system of equations rounding off with expression (3.8) furthermore establishes the methodological nature of embedding between moral and material elements induced by Tawhidi unity of knowledge. This result is shown by the fact that, just as the knowledge parameter ‘θ’ is causally determined by the explanatory knowledgeinduced variables, so also in the system of circular causation equations every variable is causally explained by the knowledge-variable. The way of calculating the ‘θ’-parameter in terms of the prorate calculation based on the inter-variable set of data is shown in the empirical part of this chapter. Thus the Tawhidi law of unity of knowledge as the ontological principle of unity of knowledge between the material and moral/ethical variables is shown to be a functional reality in socio-scientific problems. Here this point is exemplified by the study of profit-sharing as an organic relationship with moral and ethical variables. Indeed, this principle of organic unity of knowledge between all variables is a universal phenomenon. It applies to all socio-scientific problems.2 The circular causation unitary and universal nature of Tawhid as law of ‘everything’ is not found in any version of shari’ah as it has evolved in juristic context by human concocted notions rather than by deep ta’wil (deeper meaning) of Qur’an. Shari’ah approach has thus failed to establish the socio-scientific analytics in their universal and unique form, as has Tawhid as law of unity of knowledge in a perfectly inter-relational and thereby complementary world-system of moral-material intercausality by endogenous embedding. This property of the Tawhidi world-system 2 Choudhury

(2019).

46

3 Profit-Sharing Versus Interest Rate in Islamic …

derives the system of Eqs. (3.1–3.8). The contrast between the primal ontology of Tawhid as law and shari’ah as a juristic beginning is pointed out by Nasr: “Some of the scholars of the religious sciences criticized falsafah (philosophy) simply because it stood outside of the domain of the shari’ah with which they were solely concerned.”3

The Case of Debt, Riba, and Profit-Sharing in the Formal Model An important relationship of profit-sharing rate is to (R/D)-variable. The expected positive coefficient and correlation coefficients between ℘ and (R/D) would mean that, increasing real sector activity by a continuous flow of finances into the real sector will reduce the debt financing by meeting the demand by the supply of funds from the financial sector. Furthermore, recycling back the real sector yield into financial resources by the increasing wealth will sustain the R and F complementarity. Consequently, lower debt-financing remains and is liquidated by the recycling of the higher real sector yields between R and F. Such activities together enhance ℘. The ensuing complementarities between all positively related activities is caused by the permanent presence of the methodology of unity of knowledge denoted by ‘θ’. The recursive inter-variable effects of ℘ and the other variables can be noted in order to fully explain the dynamics of the whole log-linear system of Eqs. (3.1– 3.7). The estimated and simulated values (evaluation) of the inter-variable relations are signified by the elasticity coefficients. The ensuing total analytical picture on statistical evaluation establishes the organic inter-causal relations within which is taken up the meaning and evaluation of the profit-sharing indicator while resolving the problem of lateral independence character of the profit-sharing indicator.

Some Conceptual Issues Relating to Circular Causation Relations Between the Variables {R/I, R, F, R/D, θ}[θ] To notice the circular causal relations of the inter-variables with ℘ now being an explanatory endogenous variable, we first explain the positive relationship between ℘ and the other variables in the endogenously inter-related system. The positive regenerative effects of {r/i, R, F, R/D, θ}[θ] by sustained recycling through the increasing effects of r, R, F with relatively decreasing ‘i’ and D sustains the circular causation between the F and R sectors in the face of increasing (r/i). The endogenously enhancing effect by circular causation between the variables in the F and R interrelationship is caused by the sustained induction of all the variables by θeffect. Note that all variables are commonly induced by ‘θ’-parameter as knowledge indicator arising from the spring of Tawhidi ontological consciousness. 3 Nasr

(2006).

Some Conceptual Issues Relating to Circular …

47

The last Eq. (3.8) is the measurement and explanation of the empirical evaluation of Eq. (3.7) in the system of Eqs. (3.1–3.8). The meaning conveyed in this equation is that, the wellbeing of the attenuating socio-scientific system described by the positive complementarities between the inter-variable circular causation is represented by the inherent knowledge-function as the wellbeing function. This criterion measures the degree of complementarities that is expected to exist by positive organic relations between the interacting, integrating, and evolutionary learning along the path of continued sustainability of the vector {℘, (r/i), R, F, R/D, θ}[θ]. The evaluation (estimated and simulation) of the system (3.1–3.7) represents the overall result of inter-variable complementarities by circular causation as the endogenous character of the learning variables in unity of knowledge. The same equations generate the individual values in the table of the vector {℘, (r/i), R, F, R/D, θ}[θ]. The result of sustainability between the inter-variables, i.e. intra-system at a given point of time, space, and knowledge distribution as shown above can now be extended to the inter-system results over time. Thus intra-system evaluation of the vector of variables yields its inter-state evaluation over knowledge, space, and time dimensions. The reference vector now is denoted by, {℘, (r/i), R, F, R/D, θ}[θ]t over time t. Figure 3.1 explains the details of the inter-system movement of sustained intrasystem nature of relationships along evolving fields of learning by knowledgeinduction. S(θ) = (1, 2, 3, 4, 5) denotes the intra-system of interactive- integrative region common to all the sets of variables at a given point of time. The θ-value is a constructed complementary value that is averaged over {θ1 , θ2 , θ3 , θ4 , θ5 } corresponding to the respective socio-economic variables. In this way the data table for {℘, (r/i), R, F, R/D, θ}[θ] is completed. The evolution of S(θ(t)) over time ‘t’ and sustained by θ(t)-values is the intersystemic case of sustainability over knowledge, space, time dimensions. The property for this is given by, (d/dt)[dS(θ(t))/dθ > 0. Thus in terms of a figure the evolutionary 1 5

2

1 denotes { ( 1)}. { 1} are specific to 3

data column for { } 2 denotes {r/i( 2)}. { 2} are specific to data column for {r/i} 3 denotes {R( 3)}. { 3} are specific to

4 S( )=1,2,3,4,5

data column for {R} 4 denotes {F( 4)}. { 4} are specific to data column for {F}. 5 denotes {(R/D)( 5)}. { 5} are specific to data column for {R/D}

Fig. 3.1 Interactive-integrative endogenous variables in circular causation

48

3 Profit-Sharing Versus Interest Rate in Islamic …

H S(θ)

dS(θ)/dθ> 0.

H Fig. 3.2 Interactive, integrative, and evolutionary nature of S(θ)

character of the interactive and integrative S(θ) taken both intra-system (at a point of time) and inter-system (over time) is shown as follows: Figure 3.3 brings Fig. 3.2 to bear on the inter-systemic sustainable evolution of learning events (E(θ, x(θ))t across the knowledge {θ}, space {x(θ)}, and time (t) dimensions. The inter-system nature of evolutionary learning causes the events to be interactive and integrative across systems encountered along the interactive, integrative, evolutionary (IIE) learning processes along History, HH. The continuity of evolutionary learning through interactive leading to integrative experience across the History of evolutionary events shown along HH, causes non-existence of optimal and steady-state equilibrium of resource allocation in maximizing wealth. Thereby, both the neoclassical postulate of optimal allocation of resources to maximize wealth; and the Islamic economic notion of lateral independence in the calculation of optimal profit-sharing rate are rejected from acceptance. All that prevails are the continuously evolutionary knowledge by learning in circular causation across HH. The nature of such evolutionary convergences of equilibriums along HH is shown in Fig. 3.4. Learning Process 1 (HHp (S(θ))t at a specified point or period of time, t = 1, 2, 3, …; process p = 1, 2, … and system S(θ):

Hpt Hpt S(θ) causes the events E(θ,x(θ))t over dispersion of {HHp (S(θ))}t intrasystemically. The interactive, integrative, and evolutionary continuous sustainability of processes along HHp (S(θ)t ) over time-driven History HH is shown in Fig. 3.3. In

Some Conceptual Issues Relating to Circular …

En

49

H

H E1

E2

Inter-systemic evoluon of events {E(θ,x(θ))}t in sustainability across {HHp(S(θ))}t Fig. 3.3 Construction of the complex nature of interactive, integrative, evolutionary (IIE) History of learning events sustained in knowledge, space, and time dimensions as by inter-causal vector of endogenous variables, {℘, r/i, R, F, R/D,θ}[θ]t

H H Fig. 3.4 Evolutionary convergences along the Event-History {HHp (S(θ))}

the continuous case of (HHp (S(θ))t over knowledge-flows and time the multiple convoluted integrals can apply but with a higher level of mathematical difficulty.4 We note that {HHp (S(θ))}t now appears as a fibroid in knowledge, space, and time dimensions. The neoclassical, mainstream, and Islamic economic postulates of lateral independence of profit-sharing rateis fully negated. Thereby, the intrinsic circular causation relations between endogenous variables shown in the system of Eqs. (3.1– 3.7) and by elasticity coefficients in Eq. (3.8) rejects the other quantitative ways of calculating the profit-sharing rate with an organic meaning. The Tawhidi ontology of unity of knowledge thus fully annuls the other postulates and their imminent quantitative implications. Within the fibroid events of {HHp (S(θ))}t there exist multiple evolutionary equilibriums as evaluated by the system of Eqs. (3.1–3.7). In the especial case of convergence of ℘-values along the HH-trajectories but being driven by θ-values to maintain sustainability, the evolutionary convergence of {℘(θ)} along with the other endogenous variables is shown by the permanent evolutionary nature of such equilibriums without there being attainment of steady-state equilibrium. Figure 3.4 depicts the nature of such evolutionary convergence for learning equilibriums of the variables as by the continuous estimation and simulation of the circular causal solutions of Eqs. (3.1–3.7). Such properties of the profit-sharing rate in relation to other endogenous variables cannot be explained by the crass treatment of profit-sharing rate in conventional economics and this perspective used in Islamic economics.    = conv{θ} conv{x(θ )} t W{θ, x(θ), t}dx(θ)dθdt, with W denoting the wellbeing function over knowledge, space, and time dimensions. The wellbeing function is a non-linear function of {θt ,t}. Non-linearity property of all the variables and functions shown in Eqs. (3.1–3.7) and elsewhere means the jointly stochastic nature of the coefficients and the variables.

4 (HH (S(θ)) p t

50

3 Profit-Sharing Versus Interest Rate in Islamic …

H1

H2

{θ}:θ 1

H3

θ2

Hn θn

Knowledge

{x(θ)}: S1(θ1) S2(θ 2)

Sn(θ n) Space (evoluonary evaluaon of {θ,x(θ),t}

t:

t=n

t=1

t=2

Time

Fig. 3.5 Transcendence of intra-systemic results across sustainability of knowledge, space, and time dimensions

The sustainable inter-system extension of the intra-system case of evaluation of the system (3.1–3.7) proceeds in two stages. Firstly, the system (3.1–3.7) is evaluated over specified periods of time, as in the case of periodic evaluation of profit-sharing rate over specified periods of time. Secondly, the results arising from the periodic evaluation of Eqs. (3.1–3.7) are used to generate the time-trend of the periodic evaluated results for the system of Eqs. (3.1–3.7). Figure 3.5 explains such a two-pronged case of evaluating the vector x(θ) = {℘, r/i, R, F, R/D, θ}[θ]t . The sustainable evolution of the evaluation results of Eqs. (3.1–3.7) over knowledge, space, and time dimensions is repeated by the method similar to the recursive circular causation between the endogenous variables. In the present case the time-trend extension is applied to the extended vector, {{θ}, {x(θ)}}t in the same circular causation relations between these vector of variables. Thus the transcendence of Tawhidi unity of knowledge is found to determine the entire sustainability path of {HHp (S(θ))}t both in the intra-system and the inter-system cases of the organic relational nature of interactive, integrative, and probabilistic evolutionary learning processes. The continuity and repeated evaluation of the intertemporal events in {HHp (S(θ))}t poses a complex and difficult quantitative and interpretive task. Such advanced and complex quantitative work can be carried out by evolutionary computing5 and methods of Brownian Motion.6

Econometric Application Equations (3.1–3.7) are estimated by means of the log-linear forms of the f-functions. The equations are converted to make them amenable to estimation. ln(℘) = C1 + a1∗ In(r/i) + a2∗ ln(R/F) + a3∗ ln(R/D) + a4∗ ln θ

(3.9)

ln(r/i) = C2 + b1 ∗ ln(℘) + b2 ∗ ln(R/F) + b3 ∗ ln(R/D) + b4∗ ln θ

(3.10)

ln(R/F) = C3 + d1 ∗ ln(℘) + d2 ∗ ln(r/j) + d3 ∗ ln(R/D) + d4 ∗ ln θ

(3.11)

5 Fogel

(1995). (1964).

6 Feynman

Econometric Application

51

ln(R/D) = C4 + e1∗ ln(℘) + e2∗ ln(r/j) + e3∗ ln(R/F) + e4∗ ln θ

(3.12)

ln θ = D1 + D2∗ ln ℘ + D3∗ ln(r/I) + D4∗ ln(R/F) + D5∗ In(R/D)

(3.13)

The variables are derived from the following data for Malaysia as follows for the period March 2015 (Quarter 1) to end of 2018 (last available Quarter) by last day of every Quarter: xc -values across data columns ‘c’: ℘ r

CP09, Islamic Banking data, ‘Net Profit Margin’ (rate) (CP07 + CP08)/2, Islamic Banking data, ‘(Return on Assets, ROA) + (Return on Equity, ROE)/2’ F CP19, Islamic Banking data, ‘Total Financing at End of Current Period’ R CP08, Islamic Banking data, ‘Gross Income’ D CP14, Islamic Banking data, ‘Short-Term Liabilities’ ‘i’ from Interest Rate Table for the last day of every Quarter starting March 31 (Quarter 1) 2015 to last available Quarter (last day) 2018. ‘θc ’ for each  entry across the list of variables is calculated as, Prorata values,  column θc = θ∗c /x∗ · x; θc ∗ = 10 for the best acceptable value of xc = x∗c Thereby, 4 θc Average θc across columns  c = (1/4)Σc=1 The data table is thus constructed completely as, Natural logarithmic transformation of these (xc ,θc )-values and θ-values Time

x1

θ1

x2

θ2

x3

θ3

x4

θ4

Average ‘θc ’

t

℘

θ1

(r/i)

θ2

(R/F)

θ3

(R/D)

θ4

4 θ 1/4Σc=1 c

The empirical estimations based on OLS method and using the full table with computed θ-values as ranks by pro-rating in terms of the x-explanatory values are shown in the appendix. The following method of prorating θ-values as ranks is used: The construction of the table shows that each of the variables is induced by its own column ‘θc ’-value along with the maximum value, θc = θ* for each of the columns. Thereby, each of the column xc -value is induced by the prorated {θc }-knowledge-values, meaning the best attained values of unity of knowledge among the variables as prorated by the maximum values of the respective columns.

52

3 Profit-Sharing Versus Interest Rate in Islamic …

Exogenous nature of variables in Islamic econometric models a la mainstream economics Islamic banks and shari’ah-based Islamic economics claim that Islamic business is done in the absence of riba (interest). To Tawhid as law, riba-abolition is a goal that can at best be attained as a learning phenomenon along the evolutionary processes of events in {HHp (S(θ))}t . Indeed, in reality of financial globalization it is evident that Islamic finance is deeply entangled with international capital markets and financial institutions. 7 The prime rates of interest of central banks in Muslim countries affect the monetary policies. This in turn causes fractional monetary system to affect Islamic banking system. The Qur’an (2:286) allows its votaries to relinquish forbidden things gradually along the path of evolutionary learning towards attaining the target of purity and piety: “Allah does not charge a soul except [with that within] its capacity. It will have [the consequence of] what [good] it has gained, and it will bear [the consequence of] what [evil] it has earned.” “Our Lord, do not impose blame upon us if we have forgotten or erred. Our Lord, and lay not upon us a burden like that which You laid upon those before us. Our Lord, and burden us not with that which we have no ability to bear. And pardon us; and forgive us; and have mercy upon us. You are our protector, so give us victory over the disbelieving people.” Therefore, in the Eqs. (3.1–3.8) or Eqs. (3.9–3.13) according to shari’ah approach of Islamic economics, the variable ‘i’ remains independent of all other variables. To demonstrate this in one case the profit-sharing equation in the shari’ah implication is written as, ℘ = f(r, i, R, F, D), with no analytically formalized presence of ‘θ’ inducing the variables. In this expression ‘i’ has its exogenous effect on ℘, but profit-sharing rate does not affect interest-rate because of their mutual exclusiveness in an Islamic market.8 Islamic financial data do not publish interest rates relative to profit-sharing rate. This feature of shari’ah financial-economic thinking rules out the reality of reconstructing the riba-market into progressively transformed profit-sharing market by evolutionary learning., as by the endogenous effect of ‘θ’.

7 Roy

(2006). feature though is not of neoclassical economics where ‘i’ can be market-determined in the presence of its marginal rate of substitution with ℘ and r without the continuous sustainability of evolutionary learning effect of ‘θ’. In the case of sustainable continuity effect to prevail by evolutionary learning, the neoclassical optimal surfaces (e.g. indifference curve, welfare function surface, production possibility curve, production factor isoquants, etc.) become fuzzy and dysfunctional in optimal and equilibrium analysis of neoclassical economic theory.

8 This

Appendix: Empirical Estimates

53

Appendix: Empirical Estimates OLS (With θ) Inθ = 0.82858697 phi + 10.4235672 r/i + 1.18330249 F + 0.35321922 gR/D + 1.14324027 + e t Stat (5.86067062) (6.29108701)

(20.1264505)

(18.2094453)

(30.6061841)

R = 0.99194735 2

phi = −6.2171615 r/i − 1.0868443 F − 0.3228079 gR/D + 0.85739878 In θ − 0.924107 + e t Stat (−2.1830873) (−7.2143365) (−6.933344)

(5.86067062)

(−4.8010316)

R = 0.90732685 2

r/i = −0.0787745 F − 0.0231696 gR/D + 0.07086803 In θ − 0.040849 phi − 0.0821979 t Stat (−4.8831477) (−4.6523598)

(6.29108701)

(−2.1830873) (−6.4661049)

R = 0.92306659 2

F = −0.2919995 gR/D + 0.81686046 In θ − 0.7250612 phi − 7.9984147 r/i − 0.922944 t Stat (−16.286912)

(20.1264505) (−7.2143365) (−4.88314477) (−13.660187)

R = 0.97908611 2

gR/D = 2.71641176 In θ − 2.3991131 phi − 26.208127 r/i − 3.2529789 F − 3.0905566 t Stat (18.2094453)

(−6.933344) (−4.6523598) (−16.286912) (−14.342287)

R = 0.97456844 2

Inter-correlation Table lnTetha lnTetha

phi

r/i

F

gR/D

0.82858697

10.4235672

1.18330249

0.35321922

−6.2171615

−1.0868443

−0.3228079

Phi

0.85739878

r/i

0.07086803

−0.040849

F

0.81686046

−0.7250612

−7.9984147

gR/D

2.71641176

−2.3991131

−26.208127

−0.0787745

−0.0231696 −0.2919995

−3.2529789

Data Table Time

Phi

r/i

F

gR/D

LnTetha

2013Q4

0.38

0.031

0.207

0.67

2.264305296

2014Q1

0.40

0.031

0.204

0.073

2.065497077

2014Q2

0.39

0.029

0.194

0.069

2.029018195 (continued)

54

3 Profit-Sharing Versus Interest Rate in Islamic …

(continued) Time

Phi

r/i

F

gR/D

LnTetha

2013Q3

0.40

0.026

0.178

0.070

1.962297245

2014Q4

0.39

0.026

0.190

0.074

1.980778972

2015Q1

0.36

0.023

0.210

0.066

1.960443917

2015Q2

0.38

0.024

0.203

0.124

1.99522551

2015Q3

0.38

0.025

0.199

0.138

2.013989793

2015Q4

0.38

0.025

0.161

0.144

1.969881207

2016Q1

0.42

0.027

0.122

0.145

1.965301053

2016Q2

0.38

0.024

0.118

0.145

1.898194951

2016Q3

0.38

0.025

0.094

0.144

1.882112081

2016Q4

0.39

0.026

0.114

0.163

1.933404445

2017Q1

0.45

0.029

0.120

0.168

2.010128749

2017Q2

0.41

0.027

0.116

0.174

1.972876979

2017Q3

0.43

0.028

0.117

0.153

1.993264571

2017Q4

0.43

0.028

0.103

0.172

1.975040269

2018Q1

0.34

0.024

0.113

0.197

1.87025219

2018Q2

0.39

0.026

0.114

0.186

1.933953309

SUMMARY OUTPUT Regression statistics Multiple R

0.99596554

R Square

0.99194735

Adjusted R Square

0.9896466

Standard error

0.00853166

Observation

19

ANOVA

Regression Residual Total

df

SS

MS

F

Significance F

4

0.1255293

0.03133233

431.139648

1.74426–14

0.00101905

7.2789E−05

14 18

0.12654335

1.14324027

0.82853697

10.4235672

1.18330249

0.35321922

Intercept

phi

r/i

F

gR/D

Coefficients

0.01939758

0.0587934

1.65637356

0.14133091

0.03735324

Standard error

18.2094453

20.1264505

6.29103701

5.86067062

30.6061341

t Stat

3.8194E−11

9.8726E 12

1.9843E−05

4.1413E−05

3.1653E−14

P-value

0.31161555

1.05720318

6.8699161

0.52535507

1.06312553

Lower 95%

0.3943229

1.30940179

13.9772133

1.13131338

1.22335501

Upper 95%

0.31161555

1.05720318

6.8699161

0.52 5 3550 7

1.06312553

Lower 95.0%

0.3943229

1.30940179

13.9772133

1.13131338

1.22335501

Upper 95.0%

Appendix: Empirical Estimates 55

56

3 Profit-Sharing Versus Interest Rate in Islamic …

SUMMARY OUTPUT Regression statistics Multiple R

0.95253706

R Square

0.90732685

Adjusted R Square

0.8808488

Standard error

0.00867873

Observation

19

ANOVA df

SS

MS

F

Significance F

Regression

4

0.01032404

0.00253101

34.2671403

4.3156E−07

Residual

14

0.00105448

7.532E−0S

Total

18

0.01137353

0.85739378

LnTetha

0.14629704

0.15065062

0.04655377

−1.0868443

−0.3226079

2.3473753

−6.2171615

r/i

gR/D

0.19243093

−0.924107

Intercept

F

Standard error

Coefficients

5.86067062

−6.933344

−7.2143365

−2.1830873

−4.6010316

t Stat

4.1413E−05

6.9451E−0 6

4.4642E−06

0.0465514

0.00023202

P-value

0.54362233

−0.4226666

−1.4099577

−12.325248

−1.3369375

Lower 95%

1.17117473

−0.2229493

−0.7637308

−0.1090754

−0.5112765

Upper 95%

0.54362233

−0.4226666

−1.4099577

−12.325248

−1.3369375

Lower 95.0%

1.17117473

−0.2229493

−0.7637308

−0.1090754

−0.5112765

Upper 95.0%

Appendix: Empirical Estimates 57

58

3 Profit-Sharing Versus Interest Rate in Islamic …

SUMMARY OUTPUT Regression statistics Multiple R

0.96076355

R Square

0.92306659

Adjusted R Square

0.90108562

Standard error

0.00070348

Observation

19

ANOVA df

SS

MS

F

Significance F

Regression

4

8.3123E−05

2.0732E−05

41.9933395

1.1902E−07

Residual

14

6.9283E−06

4.9488E−07

18

9.0056E−05

Standard error

0.01271212

0.01613192

0.00498018

0.01126483

0.01871157

Coefficients

−0.0821979

−0.0787745

−0.0231696

0.07086803

−0.040849

Intercept

F

gR/D

LnTetha

phi

−2.1830873

6.29108701

−4.652 3 598

−4.8831477

−6.4661049

t Stat

0.0465514

1.9848E−05

0.00037341

0.00024179

−1.4826E−05

P-value

−0.0809813

0.04670737

−0.033851

−0.113374

−0.1094627

Lower 95%

−0.0007167

0.09502868

−0.0124882

−0.044175

−0.0549331

Upper 95%

−0.0809813

0.04670737

−0.033851

−0.113374

−0.1094627

Lower 95.0%

−0.0007167

0.09502868

−0.0124882

−0.044175

−0.0549331

Upper 95.0%

Appendix: Empirical Estimates 59

60

3 Profit-Sharing Versus Interest Rate in Islamic …

SUMMARY OUTPUT Regression statistics Multiple R

0.9894878

R Square

0.97900611

Adjusted R Square

0.97311071

Standard error

0.00703869

Observation

19

ANOVA df

SS

MS

F

Significance F

Regression

4

0.03293316

0.00823329

163.862002

1.3744E 11

Residual

14

0.00070347

5.0248E−05

Total

18

0.03363663

Standard error

0.06756452

0.01792347

0.04063641

0.10060232

1.6379629

Coefficients

−0.922944

−0.2919995

0.81636046

−0.7250612

−7.9984147

Intercept

gR/D

LnTetha

phi

r/i

−4.8831477

−7.2143365

20.1264505

−16.286912

−13 660187

t Stat

0.00024179

4.4642E−06

9.8726E−12

1.7048E−10

1.7434E−09

P-value

−11.511496

−0.9406183

0.72931126

−0.3304522

−1.0678554

Lower 95%

−4.4853337

−0.5095041

0.90390966

−0.2535467

−0.7780325

Upper 95%

−11.511496

−0.9406183

0.72931126

−0.3304522

−1.0678554

Lower 95.0%

−4.4853337

−0.509 5041

0.903 90966

−0.2535467

−0.7780325

Upper 95.0%

Appendix: Empirical Estimates 61

62

3 Profit-Sharing Versus Interest Rate in Islamic …

SUMMARY OUTPUT Regression statistics Multiple R

0.98720233

R Square

0.97456344

Adjusted R Square

0.96730228

Standard error

0.0236597

Observation

19

ANOVA df

SS

MS

F

Significance F

Regression

4

0.30032106

0.07508026

134.124267

5.3818E−11

Residual

14

0.00733694

0.00055978

Total

18

0.308158

Standard error

0.21543562

0.14917598

0.3460254

5.63329742

0.19972963

Coefficients

−3.0905566

2.71641176

−2.3991131

−26.208127

−3.2529789

Intercept

LnTetha

phi

r/i

F

−16.286912

−4.6523598

−6.933344

18.2094453

−14.342287

t Stat

1.7043E−10

0.00037341

6.9451E−06

3.8194E−11

9.1974E−10

P-value

−3.6813563

−38.290348

−3.1412638

2.39646111

−3.5527273

Lower 95%

−2.8246015

−14.125905

−1.6569625

3.0363624

−2.6283859

Upper 95%

−3.6813563

−38.290348

−3.1412638

2.39646111

−3.5527273

Lower 95.0%

−2.8246015

−14 125905

−1.6569625

3.0363624

−2.6283859

Upper 95.0%

Appendix: Empirical Estimates 63

64

3 Profit-Sharing Versus Interest Rate in Islamic …

Estimation with and without the separate functioning of θ -values In econometric estimation of the ‘θ’ knowledge-induced (ranked) wellbeing function, subject to circular causation relations, there is good reason to avoid the inclusion of the θ-variable separately. That is because, the θ-values being based on the x(θ)-values by prorating, this could introduce the problem of multicollinearity in the estimation. Therefore, an alternative set of estimation of the circular causation relations is done to avoid this problem of bias in the coefficients by dropping the separate inclusion of θ-variable. However, in either case of econometric estimation with and without the separate θ-functioning in the system of circular causation relations, the quantitative form of the wellbeing function, that is ν(θ)→θ = W(x(θ)), remains intact. We therefore evaluate the wellbeing function both with and without the inclusion of θ-variables separately. OLS (Without θ) phi = 9.39319434 r/i − 0.2496185 F − 0.0689235 gRD + 0.1937552 + e t Stat (5.19133944) (−2.9067012) (−2.2501419) (4.17784962) R 2 = 0.967996346 r/i = 0.01945557 F + 0.00712715 gRD + 0.06839329 phi − 0.0045108 + e t Stat (2.53918279) (2.97197445) (5.19133944) (−0.7909303) R 2 = 0.70557708 F = −0.1038304 gRD − 1.4434483 phi + 15.4514141 r/i + 0.3269919 + e t Stat (−1.2840981) (−2.9067012) (2.53918279) (2.32492172) R 2 = 0.37396662 gR/D = −3.6614545 phi + 51.9998545 r/i − 0.9538636 F − 0.36915039 + e t Stat (−2.2501419) (2.97197445) (−1.2840981) (0.75648185) R 2 = 0.37223299 In θ =0.82858697 phi + 10.4235672 r/i + 1.18330249 F + 0.35321922gR/D + 1.14324027 + e t Stat (5.86067062) (6.29108701) (20.1264505) (18.2094453) R 2 =0.99194735

Appendix: Empirical Estimates

65

Coefficient Table Phi Phi

r/i

F

gR/D

9.39319434

– 0.2496185

– 0.0689235

0.01945557

0.00712715

r/i

0.06839329

F

– 1.4434483

15.4514141

gR/D

– 3.6614545

51.9998545

– 0.1038304 – 0.9538636

Raw Data Time

Phi

r/i

F

gR/D

2013Q4

0.38

0.031

0.207

0.67

2014Q1

0.40

0.031

0.204

0.073

2014Q2

0.39

0.029

0.194

0.069

2013Q3

0.40

0.026

0.178

0.070

2014Q4

0.39

0.026

0.190

0.074

2015Q1

0.36

0.023

0.210

0.066

2015Q2

0.38

0.024

0.203

0.124

2015Q3

0.38

0.025

0.199

0.138

2015Q4

0.38

0.025

0.161

0.144

2016Q1

0.42

0.027

0.122

0.145

2016Q2

0.38

0.024

0.118

0.145

2016Q3

0.38

0.025

0.094

0.144

2016Q4

0.39

0.026

0.114

0.163

2017Q1

0.45

0.029

0.120

0.168

2017Q2

0.41

0.027

0.116

0.174

2017Q3

0.43

0.028

0.117

0.153

2017Q4

0.43

0.028

0.103

0.172

2018Q1

0.34

0.024

0.113

0.197

2018Q2

0.39

0.026

0.114

0.186

SUMMARY OUTPUT Regression statistics Multiple R

0.82459897

R Square

0.67996346

Adjusted R Square

0.61595615

Standard error

0.01558107

Observation

19

66

3 Profit-Sharing Versus Interest Rate in Islamic …

ANOVA df

SS

MS

F

Significance F

Regression

3

0.00773698

0.00257899

10.6232159

0.00053408

Residual

15

0.00364154

0.00024277

Total

18

0.01137853

1.80939706

0.08587692

0.03063073

9.39319434

−0.2496185

−0.0689235

F

gR/D

0.04637678

0.1937552

r/i

Standard error

Intercept

Coefficients

−2.2501419

−2.9067012

5.19133944

4.17734962

t Stat

0.03987713

0.01084626

0.00010955

0.00030328

P-value

−0.1342114

−0.4326609

5.53655579

0.09490544

Lower 95%

0.0036356

−0.0665762

13.2498329

0.29260496

Upper 95%

−0.1342114

−0.4326609

5.53655579

0.094 90544

Lower 95.0%

−0.0036356

−0.0665762

13.2498329

0.29260496

Upper 95.0%

Appendix: Empirical Estimates 67

68

3 Profit-Sharing Versus Interest Rate in Islamic …

SUMMARY OUTPUT Regression statistics Multiple R

0.83998636

R Square

0.70557708

Adjusted R Square

0.64669249

Standard error

0.00132953

Observation

19

ANOVA df

SS

MS

F

Significance F

Regression

3

6.3542E−05

2.1181E−05

11.9823733

0.00029017

Residual

15

2.6515E−05

1.7676E−06

Total

18

9.0056E−05

0.0045108

0.01945557

0.00712715

0.06839329

Intercept

F

gR/D

phi

Coefficients

0.0131745

0.00239812

0.00766214

0.00570321

Standard error

5.19133944

2.97197445 0.00010955

0.00949938

0.02267892

0.44131175

−0.7909303 2.53918279

P-value

t Stat

0.04031252

0.00201568

0.00312411

−0.016667

Lower 95%

0.09647407

0.01223862

0.03578704

0.00764527

Upper 95%

0.04031252

0.00201568

0.00312411

−0.016667

Lower 95.0%

0.09647407

0.01223862

0.03578704

0.00764527

Upper 95.0%

Appendix: Empirical Estimates 69

70

3 Profit-Sharing Versus Interest Rate in Islamic …

SUMMARY OUTPUT Regression statistics Multiple R

0.6115281

R Square

0.37396662

Adjusted R Square

0.24875994

Standard error

0.0374679

Observation

19

ANOVA df

SS

MS

F

Significance F

Regression

3

0.01257898

0.00419299

2.98679457

0.06451225

Residual

15

0.02105765

0.00140384

Total

18

0.03363663

0.08085859

1.4434483

15.4514141

phi

r/i

6.08519173

0.4965933

0.14064641

0.3269919

−0.1038304

Standard error

gR/D

Intercept

Coefficients

0.02267892

0.01084626

−2.9067012 2.53918279

0.21858786

0.03451836

P-value

1.2840981

2.32492172

t Start

2.48113496

−2.5019119

−−0.2761764

0.02721117

Lower 95%

28.4216932

−0.3849848

0.06851564

0.62677264

Upper 95%

2.48113496

−2.5019119

−0.2761764

0.02721117

Lower 95.0%

28.4216932

−0.3849848

0.06851564

0.62677264

Upper 95.0%

Appendix: Empirical Estimates 71

72

3 Profit-Sharing Versus Interest Rate in Islamic …

SUMMARY OUTPUT Regression statistics Multiple R

0.610109

R Square

0.37223299

Adjusted R Square

0.24667959

Standard error

0.11356391

Observation

19

ANOVA df

SS

MS

F

Significance F

Regression

3

0.11470657

0.03823552

2.96473844

0.06574963

Residual

15

0.19345142

0.01289676

Total

18

0.308158

17.4967367

0.74282771

51.9998545

−0.9538636

r/i

F

1.62721048

0.48798314

−3.6614545

0 36915039

Standard error

phi

Intercept

Coefficients

−1.2840981

2.97197445

−2.2501419

0.75643135

t Stat

0.21858786

0.00949938

0.03987713

0.46107736

P-value

−2.5371634

14.706443

−7.1297716

−0.6709611

Lower 95%

0.62943614

89.293266

−0.1931375

1.40926134

Upper 95%

−2.5371634

14.706443

−7.1297716

−0.6709611

Lower 95.0%

0.62943614

89.293266

−0.1931375

1.40926134

Upper 95.0%

Appendix: Empirical Estimates 73

74

3 Profit-Sharing Versus Interest Rate in Islamic …

References Choudhury, M. A. (2019). The Tawhidi methodological worldview a transdisciplinary study of Islamic economics. Springer-Nature. Feynman, R. (1964). The Brownian movement. In The Feynman lectures of physics (Vol. I, pp. 41–45, No. 1). Fogel, D. B. (1995). Evolutionary computation. In Toward a new philosophy of machine intelligence. Piscataway, NJ: IEEE Press. Nasr, S. H. (2006). The meaning and role of philosophy in Islam. In Islamic philosophy from its origin to present (p. 38). Albany, New York: State University of New York Press. Roy, O. (2006). Globalized Islam, The search for a New Ummah. Columbia University Press, New York, NY.

Chapter 4

Content Approach to Analytics of Islamic Banks by Meso-economics of Inter-causality

Abstract The ontological worldview of Tawhid as the cardinal Law of unity of knowledge centering in monotheistic organic participatory methodology of the Qur’an is shown to have been evaded from the mind and actions of Islamic banks and their mentor, the Islamic Development Plan (IDB) and its think tank, Islamic Research and Training Institute (IRTI). Thereby the theory and practice of Islamic economics and finance as they must be in the true light of the qur’anic methodological worldview has remained unknown and ungrounded in the entirety of Islamic erudition in the socio-scientific meso-scale of learning. This chapter offers a critique, correction, and revived possibility to the much-needed reformation. Without such essential reformulation of the field of so-called Islamic economics, finance, science, and society, sheer banking on shari’ah and fiqh as human concocted origin, distances qur’anic erudition from the essentiality of Tawhid as the primal ontological law.

Objective Ever since the advent of Islamic Finance as an exploratory field of mainstream finance, yet having no origin in the ontology of unity of knowledge, some glaring mistakes have been made in the so-called Islamic claim on avoidance of interest rate (riba). This principle of riba is indeed central to the study and functioning of Islamic finance. Thereby, Islamic banks are required to abide by this central principle of Islamic finance and its application. This chapter will investigate this critical viewpoint in respect of the econometrics of the mind-set and activities of Islamic bank. This issue is exemplified by the Islamic Bank Bangladesh (IBBL) and its mentor in the Islamic membership, the Islamic Development Bank (IDB). The critical approach will use content (qualitative) analysis to connect with the quantitative analysis of econometrics of inter-causality contrary to the kind of econometric work that is pursued in Islamic finance. The abstracto-empirical and the dysfunctional faults of mainstream econometric use by Islamic finance are thus studied and alternatives presented.

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2020 M. A. Choudhury, Islamic Economics as Mesoscience, https://doi.org/10.1007/978-981-15-6054-5_4

75

76

4 Content Approach to Analytics of Islamic Banks …

Econometrics (Quantitative) of Content Analysis (Qualitative) of Islamic Banks The content analysis of Islamic bank exemplified by the Islamic Bank Bangladesh (IBBL) and Islamic Development Bank (IDB), two widely apart Islamic institutions, one in a less developing country and the other in a capital surplus country of Saudi Arabia, respectively, clearly establish our point of criticism. Indeed, IBBL was considered to be a leading Islamic bank by the Finance Forum, and she boasts of her performance.1 IDB as a desired mentor of development reconstruction of its Islamic countries as members has failed in implementing a vision and mission to realize results in some of the critical areas of social development conjointly with economic development. In this chapter the problem of multidimensional poverty alleviation by implementing Islamic instruments in member countries of IDB will be examined. It is shown by data from the Annual Reports of IDB that an erroneous application of Islamic financing instruments and their sectoral use have failed to project the truly Islamic worldview of unity of knowledge by sectoral and instrumental inter-causality. The IDB presence in Bangladesh with the government and IBBL has focused on mega-project financing without considering the inter-causality of development financing that ought to exist between economic growth and the ethics of development. IDB has thus failed in her member countries by being oblivious of the truly ontological origin of Islamic thought in ‘everything’, Tawhid. Tawhid as the cardinal Islamic law of oneness of Allah is explained and expressed in the Qur’an as the law of unity of knowledge explained by organic inter-causality of complementary pairing between the recommended choices of TRUTH and avoidance of the inadmissible choices of Falsehood in the midst of a learning worldview of unity of knowledge working out in the problem-domains (Qur’an 36:36; 14:24).2 IDB through its Islamic Research and Training Institute (IRTI) and its various categories of followers failed to articulate any viable theory of Islamic economics and finance. Consequently, a sound theory of avoidance of interest rate from the ontological (Tawhid in Qur’an and Prophetic traditions, sunnah) could not be derived and formalized to its working in economic, financial, and ethical fields. IDB along with its various votaries became subsumed in what is referred to as shari’ah (Islamic law as jurisprudence, not ontological in its origin in Tawhid as law). One of the grand failures in understanding riba for its extensive avoidance is the complete absence of an intertemporal theory and meaning of riba; and the opposite relationship with trade

1 Islamic

Bank Bangladesh Limited (2017). (36:36). Exalted is He who created all pairs—from what the earth grows and from themselves and from that which they do not know. Qur’an (14:24): “Seest thou not how Allah sets forth a parable?—A goodly word like a goodly tree, whose root is firmly fixed, and its branches (reach) to the heavens,- of its Lord. So Allah sets forth parables for men, in order that they may receive admonition.” Qur’an (14:26). “And the parable of an evil Word is that of an evil tree: It is torn up by the root from the surface of the earth: it has no stability.”

2 Qur’an

Econometrics (Quantitative) of Content …

77

(Qur’an, 2:275).3 The meaning of trade is taken in its vastest meaning of exchange in goods, kinds, and contracts over space and time. Besides, to test the inverse relationship between trade and interest rate, macroeconomic approach does not answer the qur’anic riba law. That is because the existing aggregate study done by macroeconomics does not answer the microeconomic nature of ethical bearing in every relationship that endears evolutionary knowledge and ethicality/morality to address the micro-foundation of aggregate theory. We have pointed out in Chap. 1 that macroeconomics in its existing aggregate analysis of variables with ethical exogeneity does not fit into answering the endogenous circular causation relations between variables and the explicit endogenous nature of evolutionary learning and inter-variable causality. Consequently, there is no correct analytical relevance for macroeconomics and thereby presently holding methodology resulting in methods of econometrics.4 The way out of this incorrect Islamic representation by so-called Islamic economics and finance and its misguided pursuit by Islamic researchers and their funding institutions is to resort to the unique and universal criterion of wellbeing function. It is the wellbeing function as the objective criterion of unity of knowledge by organic pairing between the endogenous variables in the presence of evolutionary learning that enables the ontological methodology, this being contrary to the rationality foundation of macroeconomics and econometrics, and its quantitative application by means of the circular causation system of relations generated by the wellbeing function. This includes the evaluation of the knowledge parameter in respect of the entire list of endogenous variables to statistically test their degrees of complementarities and the inter-correlations between them. The data used in such a case are derived from questionnaire survey or longitudinal statistical analysis.5 In either of these cases multivariates by segmenting groups at regional, cohort, and household levels on trade and interest rates of different kinds can reveal the responses of these categories on the interrelationships between the multivariates. Such responses will generate the parametric knowledge-based reactions in the circular causation relations between the endogenous variables. Thereby, the wellbeing parameter representing degrees of organic relations on pairing by complementarities (positive coefficients and their statistical analysis) and inter-correlations can be evaluated. Furthermore, the evaluation of wellbeing model with circular causation relations between the endogenous multivariates by all conformable methods result in time-series or cross-sectional study,6 can be subjected to simulation of the 3 Qur’an

(2:275). Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, “Trade is [just] like interest.” But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in interest or usury]—those are the companions of the Fire; they will abide eternally therein. 4 Choudhury (2006). 5 Newsom, Jones, and Hofer (2011). 6 My students apply VAR and VECM methods, Structural Equations Model (SEM), SDA and Likert analysis.

78

4 Content Approach to Analytics of Islamic Banks …

coefficients by Spatial Domain Analysis (SDA) to generate random choices of coefficients as desired for generating various kinds of results and for policy analysis under different scenarios of implications.

Multivariate Wellbeing Model of Trade and Interest Rates Macroeconomics and econometrics are unable to estimate, formulate, study, and provide inferences regarding ethical sensitivity by interactions between the variables. These methods do not provide the estimated/simulated values of degrees of unity of knowledge between the variables as conveyed by the simulated coefficients by say SDA. Replacement of such macroeconomic econometric approaches by microeconomic ones results in the following model of trade and riba in a multivariate sense. An approach of this type has not been thought of by so-called Islamic economists and finance experts. Their mentor organizations have failed to inculcate the underlying methodological worldview of unity of knowledge to affect the wellbeing criterion of objectivity. Contrary to having accomplished such creative contributions that are truly conformable with the Islamic ontological foundation of the law of Tawhid, the socalled Islamic economists and their leading mentor, IDB-IRTI and their sister organizations along with the jurisprudential council of Organization of Islamic Conferences (OIC Fiqh Council) have immersed themselves in the misleading jurisprudential garb of shari’ah. Consequently, the Islamic permanence of relationship between trade and riba has remained untested and thwarted in Islamic thought regarding the qur’anic law. It is absolutely possible that over time there can be positive relationship between trade and riba. This macroeconomic econometric result contradicts the qur’anic law on trade and riba. Following is the multivariate trade versus riba model of wellbeing. It represents the explanatory measure of unity of knowledge reflecting the organic pairing of complementary relationship between the choices by the law of Tawhid (trade) in the TRUTH domain; avoiding riba in the FALSE domain. Let the vector of knowledge-induced (‘θ’) variables be denoted by,   x(θ) = T1 , T2 , . . . , Tn , i1 , i2 , . . . , in , r1 , r2 , . . . , rn , y1 , y2 , . . . yn [θ],

(4.1)

where, Ts are various kinds of trade in permissible areas of TRUTH domain. Let ‘T’ denote the vector of Ts . is are various interest rates in activities to Ts . Let ‘i’ denote the vector of is . rs are various rates of returns in various Ts . Let ‘r’ denote the vector of rs . ys are various earnings corresponding to Ts . Let ‘y’ denote the vector of ys . s = 1, 2, …, n. time ‘t’ or cross-sectional and survey data are implicit in the sense of various methods of microeconomic evaluations, i.e. SEM, longitudinal etc.

Multivariate Wellbeing Model of Trade and Interest Rates

79

The wellbeing function induced by knowledge parameter ‘θ’ in its theoretical form is, W(θ) = W(θ, x(θ))

(4.2)

W(θ) is evaluated (i.e. estimated and simulated) subject to the inter-variable circular causation relations,   Tk = fk T , i, r, y, θ [θ]. T is the vector of explanatory trade variables without Tk ; k = 1, 2, . . . , n

(4.3)

  lk = gk T, I , r, y, θ [θ]. i is the vector of explanatory interest rate variables without ik ; k = 1, 2, . . . , n

(4.4)

  r k = hk T,I, r , y, θ [θ]. r is the vector of explanatory rate of return variables without rk ; k = 1, 2, . . . n

(4.5)

  y k = Jk T, I, r, y , θ [θ]. y is the vector of explanatory earning variables without yk ; k = 1, 2, . . . n

(4.6)

θ = W(T, i, r, y)[θ] as a simplified quantitative form of the theoretical wellbeing function. k = 1, 2, . . . , n.

(4.7)

The functions are all taken in the log-linear forms for the coefficients to be easily interpretable as partial inter-variable elasticity coefficients. The estimated coefficients are next simulated by appropriate methods to yield θ-induced coefficients in the light of desired changes for policy implications and reconstruction of statistical results in the light of better degrees of complementarities, positive (intra-TRUTH domain variables; intra-FALSE domain variables) and negative (FALSE with TRUTH domain variables). Several model reformulations can be done by changing the forms of the variables. Examples are {r/i} by collapsing i and r into one set of variables. Likewise there can be {T/y} collapsing T and y into one set of variables. All variables are ‘θ’-induced. Consequently, different statistical results for the coefficients would be expected. Thereby, different policy analysis and conclusions of results would be derived. The nature of econometrics of wellbeing function with circular causation between the complete set of endogenous variables chosen in reference to the TRUTH-domain and FALSE-domain by the Tawhidi law of unity of knowledge as the true Islamic law is contrary to the juristic nature of shari’ah. The latter approach is presently promoted by the failed mainstream abidance of macroeconomics and econometrics of so-called Islamic economics and finance. The contrast between the mainstream macroeconomic and econometric approaches in Islamic economics and finance, and the econometrics of circular causation in wellbeing analysis with its microeconomic

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4 Content Approach to Analytics of Islamic Banks …

orientation and infallible reference to the primal ontology of Tawhidi unity of knowledge is centrally due to the complete induction of ontological methodology and emergent quantitative methods by ‘θ’-parameter. The mainstream approach though is the failed adoption by the mentoring institutions and their votaries in the name of shari’ah jurisprudence dispensing with Tawhid as law and all that this invokes in every problem-domains of study. Tawhid meaning oneness of Allah that translates into the law of organic unity of knowledge and analytically explains ‘everything’ in various problem-domains is contrary in meaning and application to shari’ah as jurisprudence. Shari’ah does not explain ‘everything’ between the heavens and earth and is a human-concocted sectarian development in Muslim belief. Shari’ah has never ushered a methodology of divine oneness in the context of unity of knowledge and thereby does not have any ontological methodology that arises from and emulates the cardinal law of Tawhid in the Qur’an. In this regard the Qur’an (24:35) declares of Allah as the Law-Giver and thereby the completeness of the law of unity of knowledge, “Allah is the Light of the heavens and the earth. The example of His light is like a niche within which is a lamp, the lamp is within glass, the glass as if it were a pearly [white] star lit from [the oil of] a blessed olive tree, neither of the east nor of the west, whose oil would almost glow even if untouched by fire. Light upon light. Allah guides to His light whom He wills. And Allah presents examples for the people, and Allah is knowing of all things.” Even in another verse of the Qur’an (45:18)7 , while shari’ah is mentioned as the way to Tawhid, this must imply that way to be derived from and reinforcing the law of Tawhid. It is the very law uniquely that was revealed to the Prophet Muhammad for the universal order of ‘everything’. We have explained this case in Chap. 1, as what germinates from the primal ontology of Tawhid, formalizes into the way to understand the translucence of Tawhid as the universal law of monotheistic oneness, and finalizes in this evolutionary confirmation. Shari’ah as the Way of articulation of Tawhid is itself of Tawhidi genre. On this matter Abdullah Yusuf Ali comments on the qur’anic verse (45:18): Yusuf Ali footnote 4756: “Shari’ah is best translated as the “right Way of Religion”, which is wider than the mere formal rites and legal provisions, which mostly came in the Madinah period, long after this Makkan verse had been revealed.”8 Ibn Kathir9 further writes his commentary of the verse (Qur’an 45:18) as:“Then We have put you (O Muhammad) on a plain way of (Our) commandment [like the one which We commanded Our Messengers before you (i.e. legal ways and laws of the Islamic Monotheism). So follow you that (Islamic Monotheism and its laws), and follow not the desires of those who know not.”

7 Then

We put you, [O Muhammad], on an ordained way concerning the matter [of religion]; so follow it and do not follow the inclinations of those who do not know. 8 Ali (1946). 9 Taqi-ud-Din Al-Hilali and Muhsin Khan (1998).

The Theoretical Implication of Tawhid as Monotheistic Oneness …

81

The Theoretical Implication of Tawhid as Monotheistic Oneness in the Econometrics of Circular Causation and Wellbeing In mathematical language this completeness of evolutionary knowledge establishes the Fixed Point Theorem upon which the evolutionary learning equilibriums of microfoundation of macroeconomics and econometrics rest. That is, in reference to the explanation by the Figures of Chap. 1 we note the following result, Origin in the Primal Ontology of Monotheism, (Ω, S)→Derivation of the Monotheistic Unity of Knowledge, {θ }, Epistemology→ Evolutionary Learning World-System, {x(θ )}, as formal ontology} → Continuity by reference to Primal Ontology and Evolutionary Epistemology of Monotheistic Oneness by Organic Unity of Knowledge and the World-System → Completion in the Primal Ontology, (Ω, S). It is surmised that evolutionary fixed points yielding multiple equilibriums in spaces of complexity and evolutionary learning but with integrative property of convergence in an evolutionary form (call this evolutionary convergences) will entail non-compact topologies. Thus for example, by the combination of Keynesian multiple full-employment points of equilibrium with Schumpeterian evolutionary equilibrium10 will cause all Keynesian general equilibrium analysis to be transformed into fields of complex non-linearity.11 Thereby, the above derivation will apply in the case of micro-foundation of macroeconomics and its econometrics of inter-causality in wellbeing objective criterion. This is argued here to constitute the true representation of work in the Tawhidi field of Islamic economics and finance. It though remains unknown to Islamic mentoring institutions as IDB and IRTI and their shari’ah-oriented votaries. Stiglitz12 has pointed out some of the flaws with the theory of macroeconomics and thereby econometrics. The flaws are noted to be the absence of the microeconomic theory of markets, firm, and household behaviour in economic decision-making. Although Stiglitz points out the perturbations in economic decision-making caused by lack of information theory in macroeconomic theory, he still continues to base his study in perfect competition. Yet certain inclinations of household and production theory, such as the Islamic premise of avoidance of financial interest in market exchange and the religious duties of TRUTH-domain against hedonic self-interest are traits of preference formation and production menus of firms in Islamic socioethical traits. Such values can be included in the information domain that Stiglitz recommends for explicit inclusion in a reformulation of macroeconomic theory and econometrics. We have recommended similar orientation to econometric revision in the light of reading out the ethical/moral sensitivity in the econometrics of micro-foundation of macroeconomics of inter-causality in the wellbeing function. This would make 10 Gaffard

(2009). (1989). 12 Stiglitz (2018). 11 Border

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4 Content Approach to Analytics of Islamic Banks …

the methodical approach ontologically relevant and thus truly representative of the Islamic worldview of Tawhid as law in the econometric modeling of behaviour. Without such micro-foundational revision of macroeconomics and econometrics, a blind pursuit of mainstream macroeconomics, as presently done, would lead into ethical insensitivity, notwithstanding an exogenous outer sounding of ethical/moral claim, as by the shari’ah approach in so-called Islamic mentoring institutions and among their followers.

Consequences of Misspecification of Objective Criterion in Islamic Institutional Policies for the Ummah (Muslim Comity of Nations) Content study of Islamic Development Bank Annual Report 2018 shows that there is an obvious mismatch between the bold statements made and the data presented. The macroeconomic critique giving to policy prescriptions are found to exist in respect of the variation in financing by various so-called Islamic development instruments. We also note that such financing variations mismatch with the development goal of sustainability. Most important of these goals is that of wellbeing objective criterion. This goal is found to have been missed out in preference for economic growth. Consequently, several of the critical elements of wellbeing are mentioned but prove to be ineffective according to the data analysis. Among the critical elements of the wellbeing criterion is poverty alleviation by entrepreneurship and empowerment. These are inferred to be unreachable in the face of IDB’s financing made out to member governments, who are today suffering of gross inefficiencies, administrative dishonesty, social injustice, and deep political conflicts. By the pursuit of mistaken macroeconomic goals in the name of Islamic economic development instruments the very announcement by IDB of a new paradigm shift13 under its presidential directives are inferred to have taken mistaken turn. This paradigm shift is of attaining Sustainable Development Goals. Yet in the face of focusing on growth with limited resources of her membership, IDB had to make trade-offs between growth and wellbeing, thus foregoing the much required Islamic worldview of sustaining complementarities between such goals and among their role players. A reason for this failure in sustainability is IDB’s dependence on a heavily institutional financial perspective contrary to having knowledge of endogenous development.14 This approach is powered by the endogenous force of human resources 13 The

President of IDB announced his focus on paradigm shift to be the attainment of SDG by member countries. This goal is presently an impossible task for Muslim countries unless the internal political, economic, and the ethics of peace and collective self-reliance are not first established. The IDB and Organization of Islamic Conferences (OIC) have proved dysfunctional in adducing the SDG goals in their membership. On the theme of political economy of peace and consilience see Choudhury and Taifur (forthcoming). 14 Romer (1986).

Consequences of Misspecification of Objective Criterion …

83

and socio-economic linkages with market transformation contrary to the overpowering government deepening and enforcement of economic change according to their contrary mindset. Indeed, the stiffening presence of government institutions by their policy instruments governing the marketplace has for ever been the way of exogenous interference in Islamic economic history. The top-down ruling of shari’ah by government agencies has been a cause of the prevalence of institutional governance in the Muslim world. An example of this interference in the market process was the macroeconomic idea of Ibn Taimiyyah regarding his theory of hisbah, social control of market process.15 Besides, the role of endogenous ethics is sustained by extensive participation, market complementarities, and use of micro-foundation of macroeconomics in the face of wellbeing objective of unity of knowledge. Such a perspective of development sustainability and transformation is formalized in this work. At the intellectual level, a serious reason for the failure of IDB’s macroeconomic outlook of SDG for implementation in her membership is the failure of her Islamic Research and Training Institute to indoctrinate her membership development outlook and the inclination of her researchers towards mainstream economic thought. True Islamic perspectives in economic, finance, social, science, and technology constructs never came out of IDB and her IRTI. The pursuit of SDG thus remains succumbed to outmoded thoughts and models of development. The ensuing failure has been one of both sides—on the intellectual level, and on the correct policy level in the membership. IDB’s paradigm shift announced in IDB Annual Report 2018 is thus flawed. According to the objective of wellbeing in unity of knowledge it is subject to failure.

Empirical Inference of IDB’s Macroeconomic Failure of Islamic Paradigm Shift of SDG We now explain our inferences given above on the dysfunctional nature of macroeconomics and its problematic econometric outlook in Islamic context by the following data analysis in the context of sustainability cast by the wellbeing objective approach. The instruments used by the IDB are extracted from IDB (May 2016). 42 Years in the Service of Development) loan, leasing, instalment sale, technical assistance, equity participation, profit sharing, Istisna’a, Murabaha, and lines of financing extended to NDFIs. A brief explanation of each is given below: • Loan: This mode of financing is used for projects expected to have a significant socio-economic impact, with a long implementation period, and which may not be revenue generating. Loans are given to governments or public institutions mainly in Least Developed Member Countries (LDMCs) for the implementation of infrastructure and industrial projects. 15 Holland

(1982).

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4 Content Approach to Analytics of Islamic Banks …

• Leasing (Ijara): This is a medium term mode of financing for the rental of capital equipment and other fixed assets such as plant, machinery, and equipment for industrial, agro-industrial, infrastructure, transport, etc., both for the public and private sectors. Lease financing is also provided for acquiring ships, oil tankers, fishing trawlers, etc. After the end of the rental period the Bank transfers the ownership of equipment to the lessee as a gift. • Instalment Sale: Instalment Sale is similar to Leasing. The major difference is that in Instalment Sale the ownership of the asset is transferred to the beneficiary on delivery. Under this mode of financing the Bank purchases equipment and machinery, and sells it to the beneficiary at a higher price. • Equity Participation: Under this mode of financing, the Bank participates in the equity capital of existing or new companies in the public and private sectors. The Bank’s participation is limited to one-third of the equity capital of the company. • Profit Sharing: This is a form of partnership in which two or more parties pool funds to finance a venture. The partners share the profit (or loss) in proportion to their contribution to the capital. • Line of Financing to NDFIs: Under this category the Bank extends financing through equity, leasing, and instalment sale to the NDFIs in member countries to promote the growth of small and medium scale industries, mainly in the private sector. • Istisna’a: Istisna’a is a mode for trade and project financing for the promotion of trade in capital goods and the enhancement of productive capacity. It is a contract for manufacturing goods or other assets in which the manufacturer agrees to provide the buyer with goods identified by description after they have been manufactured in conformity with this description within a certain time and for an agreed price. This new mode will enable the Bank to finance working capital and thus contribute to the enhancement of productive capacity in member countries. • Murabaha: This mode of financing is used in the financing of foreign trade, both imports and exports. The Bank purchases the commodity requested and re-sells it to the beneficiary. In the case of import financing, the period of financing is up to 30 months, while, in case of export financing, it may extend up to 120 months. The financing patterns are seen to be concentrated in the instruments of murabaha, istisna’a, and deferred payments of loans, leasing (ijara). On the other hand, the principal instruments that stand on truly Islamic participatory financing instruments are mudarabah and musharakah. All other financing are supposed to revolve around these principal participatory instruments. Yet in terms of financing for a long period of time it is found that IDB financing in these areas have dried up. There is dying activity of participatory funds revolving around the principal ones. Consequently, diversification of Islamic investment mode of financing is not evident. Furthermore, as discussed earlier, the failure of IDB and its research organization, IRTI, has been on her incorrect directions of Islamic thought and creative participatory worldview. This truly Islamic approach rests otherwise on the unfailing foundation of Tawhidi unity of knowledge and on the pervasively participatory worldview. Thereby, the intertemporal riba problem has failed to be answered in IDB financing.

Empirical Inference of IDB’s Macroeconomic Failure …

85

For instance, so-called Islamic economics and finance has failed to offer the kind of intergenerational asset valuation16 for determining the premiums and rates in intertemporal leasing, murabaha, rents, loans, istisna’a, and recently in the Islamic insurance industry called takaful. It is therefore questionable practice to set rates in any of these intertemporal asset holdings by IDB and its financial prototypes. The absence of a sound method of evaluation of rates in Islamic economics and finance results in emptiness of an intertemporal conception of riba. This in turn results in deepening of risk and absence of asset and economic diversification intersectorally and inter-regionally. Consequently, the desired goal of SDG is thwarted in the existing so-called Islamic approaches of IDB-IRTI and her sister organizations, and in ‘Islamic’ economic thought. This claim of failure of mainstream approaches in ‘Islamic’ economics and finance, not having any epistemological premise, can be proved in the following way. IDB financing tables given above shows a deepening neoclassical type marginal rate of substitution of concentrated projects like murabaha, leasing, loans, and istisna’a for other worthwhile outlets like mudarabah and musharakah. The Tawhidi principle of complementarities between participatory financing instruments followed by their implications on projects, sectors, regions, and intertemporally viewed is fully negated. Shari’ah without the primal Tawhidi worldview of unity of knowledge is unacceptable in true Islamic epistemological thought. The precept of undertaking risky projects under conditions of decreasing unit risk in the face of project diversification by increased output and shareholding has remained unknown and subdued. Islamic economics and finance have unquestionably accepted the risk-return theory of mainstream economics. Contrarily, the unit-risk

16 Choudhury,

Hossain, and Mohammad (2019). The formulation of the intertemporal overlapping generation model for rate-determination can now be written as,  A0 [(1 + r)(1 + g)]t + A1 [(1 + r)(1 + g)]t−1 + · · · + At−1 [(1 + r)(1 + g)] + At = t (lt + dt ), Here, A’s denote time-dependent (t) asset values accumulated by ‘r’, rate of return, and ‘g’ real rate of growth of material values. ‘It ’ denotes time-specific investments. ‘dt ’ denotes time-specific depreciations. All variables are ‘θ’-induced. The above formulation is a microeconomic approach to asset valuation. It can be computerised at IRTI if IDB were to open up its thoughts and application to the authentic Islamic analytical direction. It is plausible assumption in the above formulation that during the finite life span an asset will experience its evolutionary convergence with the growth of knowledge embedded in the moral and material worth. The wellbeing generated by this embedding is immensely great in infinite time as the Qur’an (2:26) declares: “The parable of those who spend their substance in the way of Allah is that of a grain of corn: it grows seven ears and each ear Has a hundred grains. Allah gives manifold increase to whom He pleases: and Allah cares for all and He knows all things.” By approximation only, we can solve yet under the case of evolutionary convergence for the polynomial roots of above equation near the point of vanishing of net accumulative terminal value. Such nearness between events in knowledge, space, and time dimensions is referred to as the ‘nearest point of valuation’ event by quantitative evaluation (estimation and simulation). The values of ‘r’ as the rate of return, and ‘g’ as real growth of material returns, and thereby (r + g), are solved in the above-mentioned polynomial.

86

4 Content Approach to Analytics of Islamic Banks …

and diversification approach argues in respect of the ontological precept of unity of knowledge in expending field of risky undertaking as follows: Let σ2 (x(θ), θ, t) denote risk on the choice vector, x(θ) induced by ‘θ’-parameter. {x(θ)} includes the vector of outputs {q(x(θ), θ, t)} and the number of shareholders corresponding to outputs by projects and sectors is denoted by {sh(x(θ), θ, t)}. Joint production menus are of the essence in the light of inter-variable complementarities by unity of knowledge.17 The time variable ‘t’ implies sustainability of wellbeing denoted by its transformation by ‘θ’ or its complex non-linear form. Define unit risk (U) by diversification (D) across {q(x(θ), θ, t), sh(x(θ), θ, t)} by,   ∗  UD σ2 (x(θ), θ, t) = σ2 (x(θ), θ, t)/q(x(θ), θ, t) (1/sh(x(θ), θ, t))

(4.8)

Each shareholder (stakeholder) is encouraged to participate by observing unit risk of output under the condition of knowledge and information. This is a behavioural assumption.   θ, t)/q(x(θ), θ, t) ↓ even if σ2 (x(θ), θ, t) ↑, this implies Hence, as σ2 (x(θ),   2 UD σ (x(θ), θ, t) ↓↓ as sh(x(θ), θ, t)) ↑ with q(x(θ), θ, t) ↑ irrespective of σ2 (x(θ), θ, t) ↑. Unit risk and not risk as such governs the diversification process. Underlying this output-risk diversification result is the critical role of unity of knowledge by complementarities and participation between projects, sectors, and stakeholders. The wellbeing function, W(y(θ), θ, t) in the variables of the complete vector, y(θ, t) = {x(θ), θ, t), q(x(θ), θ, t), sh(x(θ), θ, t), UD(σ2 (x(θ), θ, t)), θ, t)} is now evaluated by taking recourse to the circular causation relations between the variables. The complete econometric model then results regarding the evaluation of wellbeing subject to the circular causation relations: Evaluate W(y(θ, t))

(4.9)

Subject to the circular causation relations:

17 Choudhury

x(θ) = f1 (q(θ)), sh(θ), UD(θ), θ, t)

(4.10)

q(θ) = f2 (x(θ), sh(θ), UD(θ), θ, t)

(4.11)

sh(θ) = f3 (x(θ), q(θ), UD(θ), θ, t)

(4.12)

UD(θ) = f4 (x(θ), q(θ), sh(θ), θ, t)

(4.13)

and Hoque (2004).

Empirical Inference of IDB’s Macroeconomic Failure …

θ = W(y(θ, t))

87

(4.14)

The evaluation (estimation, simulation) of the above system is done in the recursive sense of the variables by noting that the numbered (i, j)-variables are related by inter-causality by having yi relate to yj , such that i = j = 1, 2, . . . , n. For the sake of ready statistical analysis the functions f’s are taken in the log-linear form. The (n + 1) × (n + 1) number of equations are non-linear because of the coefficients being induced continuously by ‘θ’-parameter in evaluation. The method of generating the ‘θ’-values corresponding to the variables over time ‘t’ was explained and performed in earlier chapters. IDB Tables 4.1 and 4.2 show by content analysis that socially inclusive financing as for APIF, mudarabah and musharakah remain suppressed in waqf as Islamic endowment and microenterprise and SMEs. On the other hand, shareholding financing such as, loans, leasing, murabaha are low across the IDB membership. Such a result of content analysis proves that IDB-IRTI is steeped in imitating neoclassical substitution postulate of growth against equity. The essential property of extensive inter-financing complementarities, which should prove effective project-wise, inter-sectoral and inter-regional financing, has been forgotten. Thereby, although SDG is desired as a paradigm for pursuit by IDB, it remains distanced by IDB-IRTI’s emptiness of the true Islamic ontological premise of methodology and the imminent methods of evaluation that ought to be used in continuity across knowledge-induction in space and time. The wellbeing function is estimated subject to the circular causation equations in their log-linear forms as follows: ln M = Const + A1 ln L + A2 ln A + A3 ln θ

(4.15)

ln L = Const + A1 ln M + A2 ln A + A3 ln θ

(4.16)

ln A = Const + A1 ln M + A2 ln L + A3 ln θ

(4.17)

ln θ = Const + A1 ln M + A2 ln L + A3 ln A

(4.18)

as the log-linearized form of the theoretical form of the wellbeing function, W(M, L, A, θ)[θ]. The estimated statistical results are given in the statistical conclusion. The greatly missing point of the primal ontology of Tawhidi unity of knowledge and its translation in terms of symbiotic oneness by inter-causality between all entities is the inherent nature of shari’ah. Indeed, Ashur18 muses that everything of shari’ah is a reflection of the Qur’anic high ground of universality of knowledge. Yet he never 18 Ashur

(2013).

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4 Content Approach to Analytics of Islamic Banks …

Table 4.1 Approvals by entities and modes of financing ($ million) 1432H

1433H

1434H

1435H

1436H

2011

2012

2013

2014

2015

Loan

383.2

375.9

396.5

346.8

330.9

Equity

68.1

313.7

76.0

90.0

97.3 1

A. IDB OCR

Leasing

982.7

621.2

783.2

1,770.0

610.3

Instalment sale

220.7

927.1

182.0

416.1

357.4

Combined lines of financing

75.0

0.0

0.0

50.0

0.0

Profit sharing/Musharaka

100.0

50.0

0.0

0.0

0.0

Istisna’a

2,078.1

2,007.1

2,388.8

2,415.5

2,902.9

Mudaraba

0.0

0.0

440.0

0.0

600.0

Technical assistance

39.1

21.0

18.3

27.9

10.7

Sub-total

3,946.7

4,316.0

4,284.8

5,116.4

4,909.5

Equity

121.9

139.9

199.8

72.4

161.2

Leasing

0.0

80.0

10.0

43.2

73.0

Instalment sale

0.0

0.0

0.0

0.0

0.0

Istisna’a

5.0

0.0

0.0

20.0

0.0

Murabaha

135.0

91.1

224.0

177.9

432.7

Sub-total

261.9

311.0

433.8

313.4

666.9

Murabaha

2,788.4

4,286.4

4,901.0

5,136.4

6,396.8

D. Others

34.5

36.1

99.7

65.5

27.8

B. ICD

C. ITFC

APIF

33.5

42.8

83.7

63.8

89.1

Special Assistance

15.1

8.1

7.2

6.9

5.8

Pre-ITFC trade

0.0

0.0

0.0

0.0

0.0

Sub-Total

83.1

86.9

190.6

136.2

122.7

Grand Total

7,080.1

9,000.2

9,810.2

10,702.4

12,095.9

2016

2017

2018

935.6

708.5

45.4

Equity

15.6

0.6

0.0

Leasing

0.0

13.6

0.0

A. IDB OCR Loan

Instalment sale

617.6

1131.8

598.8

Combined lines of financing

0.0

0.0

0.0

Profit sharing/Musharaka

0.0

0.0

0.0

Istisna’a

2029.6

415.8

119.8 (continued)

Empirical Inference of IDB’s Macroeconomic Failure …

89

Table 4.1 (continued) 2016

2017

2018

Mudaraba

0.0

0.0

0.0

Technical assistance

0.2

0.0

0.0

Sub-total

3598.6

2270.2

764.1

Equity

133.9

8.5

6.6

Leasing

41.4

76.2

32.4

Instalment sale

0.0

0.0

0.0

Istisna’a

18.4

20.6

0.0

Murabaha

352.4

530.8

308.5

Sub-total

546.2

636.1

347.4

Murabaha

3744.8

4792.7

5190.9

D. Others

34.5

36.1

99.7

Waqf

8.6

5.0

14.6

APIF

29.4

27.5

32.2

B. ICD

C. ITFC

Source Islamic Development Bank (May 2016). 42 Years in the Service of Development Source IDB Annual Report 2018 Abbreviations APIF Awqaf Properties Investment Fund ICD Islamic Corporation for the Development of the Private Sector ID Islamic Dinar (equivalent to one Special Drawing Right of IMF) ITFC International Islamic Trade Finance Corporation OCR Ordinary Capital Resources of IDB Table 4.2 Computing variable specific parameterised weights Leasing + Loan + Istisna’a

Murabaha Total M

θ1

2011

2923.4

4.28

2012

4377.5

6.40

2013

5125.0

2014

5314.3

2015

6829.5

10

2016

4097.2

6.15

2017

5323.5

7.99

2018

5499.4

8.25

APIF (Waqf)

θ2

A

θ3

θ = Avg.(θ1 , θ2 , θ3 )

6387.4

5.98

33.5

3.76

4.67

7290.6

6.56

42.8

4.80

5.92

7.69

8469.5

7.62

83.7

9.39

8.23

7.97

9846.6

8.86

63.8

7.16

8.00

10

89.1

10

10

6710.0

6.04

29.4

3.30

5.16

6461.4

5.81

27.5

3.08

5.62

5664.6

5.10

32.2

3.61

5.65

L

10673.6

90

4 Content Approach to Analytics of Islamic Banks …

for once mentions as to what this unique, consistent, and unassailable knowledge of the high ground is, that is regarding Tawhid and its concrescence of the originality and particulars of the world-system. Ashur’s work is a polemical roaming around the majesty of shari’ah without a critical study. This work therefore fails to be a scientific and realistic study of the theme of shari’ah (i.e. maqasid as-shari’ah). The book also points out that, shari’ah is concerned only with matters actual, seen, and experienced; and that shar’ah avoids all matters of imagination. In doing so, Ashur and likewise his earlier reference like Imam Malik in Muwatta, dispel the important place of ontological questions of the a priori nature that bear on a posteriori matters by way of circular causation. Yet these questions have deep consequences in meta-scientific knowledge of inquiry of reality. They transcend the cosmic scale of interdependency between entities, thus explaining universality of participative pairing in ‘everything’ between the heavens and the earth. Shari’ah is thus narrowed down to human concocted19 ideals addressing a stultified understanding of reality. Even in the intertemporal sense of market valuation of assets, shari’ah forbids calculating future uncertainties of probabilistic nature, which though are realities. These eventualities are indeed real factors of SDG. Shari’ah fails to assess them in its narrow perspective of observations and thought by absenting the role of imagination.20 None of such constriction is found at all in the worldview of unity of knowledge between entities of the participative ‘everything’ according to Tawhid as THE LAW contrary to shari’ah as usul al-fiqh (jurisprudence and legislation).21 The failure of IDB-IRTI in such methodological fields and the imminent methodical approaches of valuation of assets and modes of financing have spread like destructive cancer across all mistaken ‘Islamic’ directions. The inferences of neoclassical type trade-off (substitution) between various project related, regional, sectoral, and instrumental areas by modes of financing has widening adverse consequences in the sector of Science, Technology, and Innovation (STI).22 The result of such a partitioned worldview of STI for IDB’s membership has been the backwardness of Muslim countries by their human resource remaining disjoint from the nature of modern technology. Contrarily, the dynamic life-fulfillment outlook of development caused by θ-induction over time and which could be meaningfully participative of the human resources and natural resources has never appeared in IDB-IRTI mindset. This happened despite the desire to attain SDG. A principal cause of its inappropriate 19 Shari’ah and maqasid as-shari’ah as the purpose and objective of shari’ah arose as vastly written edicts by various Muslim scholars starting from Al-Juwainy, Imam Ghazali, Ibn Taimiyyah, Imam Shafei and others. This edicts did not wholly agree between them. 20 Inglott (1990). 21 Choudhury (2019). 22 The Tawhidi approach of unity of knowledge by inter-causality of complementary entities and the shari’ah utilitarian approach are contrary to each other (e.g. STI): Tawhid as Law of Unity establishes complementarities like,[STI ⊗ Stakeholding ⊗ Social Inclusiveness ⇒ moral ⊗ material embedding][θ]. According to shari’ah approach competing dissociations prevail, [STI ⊕ Stakeholding ⊕ Social Inclusiveness ⇒ moral ⊕ material embedding] ⇒ no complementarities as the Tawhidi law. Only competition and trade-off prevails. SDG is thus fully dispensed with in the shari’ah approach as adopted by IDB-IRTI.

Empirical Inference of IDB’s Macroeconomic Failure …

91

development approaches has been IDB’s autonomy of financing of its membership governments. Yet such membership governments are almost all corrupt and devoid of constructive imagination of social inclusiveness by involving participative stakeholders.

Conclusion Statistical Appendix Leasing + Loan + Istisna’a

Murabaha Total M

θ1

2011

2923.4

4.28

2012

4377.5

6.40

2013

5125.0

7.69

2014

5314.3

7.97

2015

6829.5

10

2016

4097.2

6.15

2017

5323.5

2018

5499.4

APIF (Waqf)

θ2

A

θ3

θ = Avg.(θ1 , θ2 , θ3 )

6387.4

5.98

33.5

3.76

4.67

7290.6

6.56

42.8

4.80

5.92

8469.5

7.62

83.7

9.39

8.23

9846.6

8.86

63.8

7.16

8.00

10

89.1

10

10

6710.0

6.04

29.4

3.30

5.16

7.99

6461.4

5.81

27.5

3.08

5.62

8.25

5664.6

5.10

32.2

3.61

5.65

L

10673.6

The Wellbeing Function is Estimated Subject to the Circular Causation Equations in their Log-Linear Forms We refer here to the above-mentioned estimable Eqs. (4.15)–(4.18). Regression result (With θ) ln M = 13.03347111 + 0.723878116 ln L − 0.72164958 ln A + 2.499014199 ln θ t Stat (11.7204685) (−4.820085) (−8.6091887) (15.8751644) R 2 = 0.98880692 ln L = 16.4435713 − 0.8232588 ln A + 3.01199094 ln q − 1.178608 ln M t Stat (8.71361192) (−3.5433228) (5.37206366) (−4.8210085) R 2 = 0.97691151

92

4 Content Approach to Analytics of Islamic Banks …

ln A = 16.9420435 + 3.34819257 ln q − 1.3147593 ln M − 0.9211966 ln L t Stat (6.04069584) (11.3519899) (−8.6091887) (−3.5433228) R 2 = 0.994286966 ln θ = −5.1830667 + 0.39390583 ln M + 0.29159052 ln L + 0.28967714 ln A t Stat (−12.466873) (15.8751644) (5.37206366) (11.3519899) R 2 = 0.99840769 Coefficient Table lnM

lnL

lnM lnL

lnq

0.723878116 – 0.72164958 – 1.178608

2.499014199

– 0.8232588

lnA – 1.3147593 lnq

lnA

3.01199094

– 0.9211966

0.39390583

0.29159052

3.34819257 0.28967714

Regression result (Without θ) ln M = 5.17890636 + 0.30791198 ln L + 0.14450551 ln A t Stat (0.72672864) (0.31790614) (0.31734493) R 2 = 0.2835854 ln L = 6.83650438 − 0.4045457 ln A + 0.06434436 ln M t Stat (4.42601542) (3.77711224) (0.31790614) R 2 = 0.81033341 ln A = −13.680785 + 0.1366307 ln M + 1.83040683 ln L t Stat (−3.4575484) (0.31734493) (3.77711224) R 2 = 0.81032015 Coefficient Table lnM lnM

lnL 0.30791198

lnL

0.06434436

lnA

0.1366307

lnA 0.14450551 – 0.4045457

1.83040683

References

93

References Ali, A. Y. (1946). The Holy Qur’an, text, translation and commentary. New York, USA: McGregor & Werner. Ashur, M. T. I. (2013). Treatise on Maqasid as-Shari’ah. Herndon, VA, U.S.A.: International Institute of Islamic Thought. Border, K. C. (1989). Fixed theorems with applications to economics and game theory. Cambridge, England: Cambridge University Press. Choudhury, M. A. (2006). Islamic macroeconomics? International Journal of Social Economics, 33(2). Choudhury, M. A. (2019). The meta-science of Tawhid, a theory of oneness. New York, NY: New Palgrave. Choudhury, M. A., & Hoque, M. Z. (2004). Project financing. In Chapter 5 of their Advanced exposition of Islamic economics and finance. Lewiston, NY: Edwin Mellen Press. Choudhury, M. A., & Taifur, M. A. (forthcoming). Consilience as Islamic methodology of Tawhid (the general socio-scientific framework). In N. Maghrebi, T. Akin, Z. Iqbal, & A. Mirakhor (Eds.), Handbook of analytical studies in Islamic finance & economics. De Gruyter Publishing House. Choudhury, M. A., Hossain, M. S., & Mohammad, M. T. (2019). Islamic finance instruments for promoting long-run investment in the light of the wellbeing criterion (maslaha). Journal of Islamic Accounting and Business Review, 10(2), 1–25. Gaffard, J. (2009). Innovation, competition, and growth: Schumpeterian ideas within a Hicksian framework. In U. Cantner, J. Luc Gaffard, & L. Nesta (Eds.), Schumpeterian perspectives on innovation, competition, and growth (pp. 7–24). New York, NY: Springer. Holland, M. (1982). Public duties in Islam (Al-Hisbah Fil-Islam) (I. Taimiyyah trans.). Leicester, England: The Islamic Foundation. Inglott, P. S. (1990). The rights of future generations: Some socio-philosophical considerations. In S. Busuttil, E. Agius, P. S. Inglott, & T. Macelli (Eds.), Our responsibilities towards future generations (pp. 17–27). Malta: Foundation for International Studies & UNESCO. Islamic Bank Bangladesh Limited. (2017). Sustainable growth and shared prosperity. Annual Report 2017. Newsom, J. T., Jones, R. N., & Hofer, S. M. (2011). Longitudinal data analysis. UK: Routledge. Romer, P. M. (1986). Increasing returns and long-run growth. Journal of Political Economy, 94, 1002–1037. Stiglitz, J. E. (2018). Where modern economics went wrong? Oxford Review of Economic Policy, 34(1), 70–106. Taqi-ud-Din Al-Hilali, M., & Muhsin Khan, M. (1998). Translation of the meanings of the Nobel Qur’an. Madinah, Kingdom of Saudi Arabia: King Fahd Complex for the Printing of the Holy Qur’an.

Chapter 5

Objective Functions of Islamic Bank Bangladesh: A Critique of Islamic Economics

Abstract The failure of Islamic banks in general that is exemplified by Islamic Bank Bangladesh is pointed out by their absence of any true direction of wellbeing in the Tawhidi sense of methodology of organic unity of theory and application. In the end, Islamic banks as exemplified by the case of Islamic banks Bangladesh, are shown to be capitalist shareholding banks with blind reliance on shari’ah as human concocted jurisdictional approach contrary to the Tawhidi methodological worldview. Consequently, many of the actions by IBBL under the guidance of Islamic Development Bank (IDB) and Organization of Islamic Conferences (OIC) while claiming to be Islamically legitimate are flawed. There remain much room for improvement to know the legitimate understanding in accordance with the Tawhidi law.

Objective and Introduction The objective of this chapter is to examine the financing features of a prime example of Islamic banks, namely the Islamic Bank Bangladesh Ltd. (IBBL) on the basis of the Islamic theory of micro-foundation of macroeconomics.1 This formalism then feeds into the corresponding econometric evaluation of inter-causality between multivariates in the wellbeing function as the true Islamic socio-scientific objective. This approach was noted down in the above chapters to represent the correct methodological application for the evaluation of the Islamic moral and material embedding in a methodical way. The imminent critical approach that follows thereby relates to the objective criticism of the method of macroeconomic econometrics that is being unquestionably used in evaluation of assets and implications of policy-making with recommendations in present day’s mistaken principles underlying the methodology and methodical application of the Islamic worldview concerning Tawhidi unity of knowledge.

1 Choudhury

(1987).

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2020 M. A. Choudhury, Islamic Economics as Mesoscience, https://doi.org/10.1007/978-981-15-6054-5_5

95

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5 Objective Functions of Islamic Bank Bangladesh: A Critique of Islamic Economics

The methodology is thereby invoked in this chapter in regards to the specific problems of evaluating IBBL’s use of methods in the following directions: 1. IBBL continued focus on shareholder’s model of project financing as imitated with the general outlook of asset valuation practiced by IDB-IRTI and by shari’ah standard. The stakeholder model of participative wholeness is unknown in the context of inter-causal linkages caused by pervasive complementarities between all choices and entities.2 Thus IBBL focuses on the goal of maximization of shareholders’ wealth rather than simulation of social wellbeing of the common good as a methodical result. This though is not the intended goal of IBBL. 2. IBBL following the current track of her mentor, the IDB-IRTI, focuses on SDG by the goals of Corporate Social Responsibility and Good Corporate Governance within a macroeconomic approach of such essentially ethical issues that belong to the field of microeconomics. 3. IBBL’s focus on maximization of shareholders’ wealth evokes a utilitarian approach though with ethical intent, yet remaining methodological unsound in its additive welfare and utility background. Such a property negates the systemic way of integrating ethics in material choices.3 4. As a methodological result, the welfare treatment by IBBL experiences independent inter-sectoral allocation of financial and physical resources. An example is a low emphasis of financing given to agricultural sector in Bangladesh. 5. The absence of endogenous treatment in moral-material embedding causes weakness of the SDG goal, as in the case of IDB. Thereby, a long-term perspective of the truly Islamic worldview of SDG is ignored in a methodological sense. 6. IBBL like her major institutional shareholders by not knowing the endogenous linkage concept between sectors and entities in financing has resulted in a focus on the independent contractual idea of project financing. Thereby, the analytical outlook of inter-causal linkages, as in the example of Foreign Trade Financing Certificate with multiple linked matrix of contracts, remains unknown and abandoned. Such inter-sectoral and inter-entity multivariate linkages in financing are effective in jointly realizing product-diversification and risk-diversification to the benefit of heightened investment. 7. Consequent to the above issues lingering upon IBBL model of financing and development with objective social inclusiveness, IBBL as an important Islamic institution has failed like her other mentors in raising the intellectual outlook of Islamic economics and finance in the truly Islamic methodological sense. This missing aspect of IBBL training program adversely affects her human resource development, which is considered important in IBBL’s strategic objectives. Indeed. IBBL’s human resource development is conducted by IBTRA (Islamic Bank Training and Research Academy) in Dhaka, Bangladesh.

2 Lozano

(2002). (1989), Harsanyi (1955).

3 Hammond

Objective and Introduction

97

8. Consequent to the above issues and problems in the methodological modeling though not intent of IBBL’s Mission and Vision,4 IBBL shares with her mentors5 in objectively understanding the development of a truly Islamic Stock Market and in participating to realize Islamic monetary policing as a new financial architecture. Likewise, the functioning of Islamic charity and endowment called waqf fails in actualizing the wellbeing objective contrary to the focus on economic growth and financing for economic growth contrary to social wellbeing.6

A Critical Review of IBBL in the Light of the Theory of Micro-foundation of Macroeconomics and Its Econometric Features as the Truly Islamic Methodologically Embedded Methodical Approach To start with the objectives of IBBL in her Mission and Vision can be found to be no different from any other banking institution. Thereby, no particular demand and challenge are hoisted on IBBL to enact the truly Islamic worldview of socio-scientific thought and its application to development. The most important of the development paradigm is the model of continuity over knowledge, space, and time concerning moral-material embedding in accordance with the Tawhidi law of unity of knowledge and its casting in the evaluation of the wellbeing criterion that represents the unity by complementarities by inter-causality between the learning systems of variables. This indeed is the true and correct perspective of SDG in the Islamic worldview. In this respect of SDG interactively integrating the evolutionary learning properties of development of soul, mind, and matter in continuums of rising consciousness we have the model of actualization given by Ghazali in his depiction of knowledge through sixty veils of light. Our depiction of such evolutionary learning processes through stages of excellence is equivalent to the model of development of sustainability over continuously complementary, connected by inter-causality movement of events occurring in knowledge, space, and time dimensions. The historical path of consciousness towards rising understanding of Tawhidi unity of knowledge comprises the micro-foundational composition of the holistic picture. Figure 5.1 delineates the historical path of consciousness in terms of evolutionary learning events by continuous reference to Tawhidi unity of knowledge and its relationship

4 Islamic

Bank Bangladesh Limited (2019). (Saudi Arabia), Kuwait Finance House (Kuwait), Jordan Islamic Bank (Jordan), Islamic Investment & Exchange Corporation (Qatar), Bahrain Islamic Bank (Bahrain), Islamic Banking System International Holding (Luxembourg), Al-Rajhi Company for Currency Exchange & Commerce (Saudi Arabia), Dubai Islamic Bank (Dubai), Public Institution of Social Security (Kuwait), Ministry of Awqaf and Islamic Affairs (Kuwait), Ministry of Justice, Department of Minors Affairs (Kuwait). 6 Choudhury (1988). 5 IDB

98

5 Objective Functions of Islamic Bank Bangladesh: A Critique of Islamic Economics True Islamic Mission and Vision

H

{E(θ)}:

Tawhid as law of organic unity of knowledge translated as the ineluctable principle of complementaries. Invoking the imminent wellbeing criterion for evaluaon of the degree of complementaries as represenng Tawhidi unity of

{E(θ)}

H The fibre-shape of HH explains inter-systemic Interacon, integraon, and evoluonary learning Along HH in historical consciousness1

IBBL Mission IBBL Vision Do not reflect thetrue Islamic worldview establish Islamic banking as welfare instuon in equity and jusce in economic acvies; achieve balanced growth by diversified investment in priority sectors; aain socioeconomic development in low-income communies

achieve superior financial performance flourish in modern banking environment Islamic principles of financial soundness: financial efficiency human resource development, accountability, transparency, integrity of financial systems; encourage savings for direct investment

As an example, similar ethical mission and vision were in the emblem of the cooperave movement that arose from the Angonish movement. It centered in human resource development, employment, and pooling of resources for the common communitarian good.2

Fig. 5.1 IBBL does not have any particular precepts in its Mission and Vision that can be identified as especially Islamic in origin

to the moral-material embedded universality and particulars of the diverse worldsystems of micro-foundations. The macro-picture of Historical Path of Consciousness ‘HH’ is thus described by its micro-foundations of events (E(θ, X(θ), t(θ)) = E(θ).

IBBL Mission and Vision As an example, embedded in every such event are the Islamic Mission and Vision of Islamic Economics and Banking among plethora of wellbeing objective with intercausal variables existing in their complementarities (positive or negative—maslaha and mafasid, respectively). It is therefore found that there was no difference in outlook of IBBL Mission and Vision from those of other ethical financial institutions. The main difference that the true Islamic worldview makes with other ethical conceptions and the presently prevailing Islamic ethical/moral idea is the centerpiece of Tawhid

A Critical Review of IBBL in the Light of the Theory …

99

in the world-system and its functioning. Such an institutional system is exemplified here by banking vis-à-vis the nature of economic and financial concepts used by the present days’ Islamic financial institutions. The inference is that the event E(θ) is differently characterised along HH between the Tawhid centered financial worldview and the non-Tawhidi one being pursued by all presently existing financial institutions.

Absence of Modeling the Micro-foundation of Macroeconomics and Thereby the Wellbeing Goal in IBBL The absence of the primal ontological premise of Tawhid in IBBL Mission and Vision means that ‘θ’ is non-existent in all the financial and economic asset evaluation. Therefore, the endogenous form of circular causation relations to evaluate the wellbeing objective criterion of Tawhidi genre does not exist in IBBL ‘Business Model’. A principal consequence of such loss of the Tawhidi worldview and its replacement by the shari’ah reference is to be oblivious of the endogenously forward and backward related inter-sectoral, inter-financial instruments, and interactively integrated ‘Business Model with the Socio-Economic Model’. This implies imminent failure to the attainment of the goal of SDG in its substantive meaning of the events {E(θ)}. No challenge is made in IBBL human resource development while tracking the uncreative pursuit of mainstream economics and financial theories to answer the Islamic worldview. The econometrics of exogenous ethics/morality remains a financial driven pursuit. It is not driven by endogenous functions of the market processes. Consequently, subservience to shareholders and government dependence on risk-aversion postulate is inevitable.7, 8

A Prescribed Model of Endogenous Inter-causal Dependence for Asset Valuation The reinstating of ‘θ’-values in the asset valuation approach in knowledge, space, and time along HH makes the {E(θ)} as inter-systemic and intertemporal points of asset valuation that are ‘nearest’ to the point of occurrence of contingencies affecting such events. The emergent model of such valuation was shown in a footnote of Chap. 3 in respect of valuation along the inter-generational asset valuation model. Each event 7 Kaku

(2015, p. 43) writes: “Consciousness is the process of creating a model of the world using multiple feedback loops in various parameters (e.g. in temperatures, space, time, and in relation to others), in order to accomplish a goal (e.g. find mates, food, shelter).” Kaku calls the above definition of phenomenological consciousness as the ‘space–time theory of consciousness’. In our book consciousness (phenomenology) will be referred to in terms of the spanning over knowledge, space, and time dimensions. 8 MacPherson (n.d.).

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5 Objective Functions of Islamic Bank Bangladesh: A Critique of Islamic Economics

point is an evaluation of the moral-material embedded point by circular causation, and hence by evolutionary learnt decision-making points by interaction and integration. Thereby, the entire HH-path so realized is the path of SDG. The evaluation of the effectiveness of events along HH in respect of SDG causes the monitoring of the direction towards SDG and frames the model of wellbeing evaluated subject to circular causation endogenous relations between the representative variables of SDG in the wellbeing function. An example of such a critically different way of asset valuation by the ‘nearest to probabilistic event points’ is the evaluation of effectiveness of CSR and GCG. These are elements inherent in SDG. Thereby, SDG, CSR, and GCG driven as consciousness has been defined above to be of phenomenological nature driven by ‘θ’-parameter of Tawhidi unity of knowledge embedded in generality and particular issues and problems of diversely interactive, integrative, and learning world-systems. According to the Tawhidi Mission and Vision of Fig. 5.1, SDG is defined by SDG(θ) along the events describing the historical path of consciousness HH. The endogenous elements of SDG(θ) are defined by Conscious CSR − CSR(θ). CSR and CSR(θ) are different concepts and practices. CSR is exogenously policed for attaining certain social goals. Such targets and policies are enforced by international development organizations, national governments on institutions. IBBL is an example. CSR(θ) is deontological moral/ethical/social consciousness. It is therefore an endogenous act and outcome of interactive learning to set targets and and goals of social corporate behavior. The participants at the event points of {E(θ)} in the derivation of policies, programs, and guidance collectively determine their directions out of deontological consciousness. This is formed by knowledge in the organic sense of inter-causal unity of relations. The Qur’an (24:38–39) declares regarding such conscious business behavior: “[Are] men whom neither commerce nor sale distracts from the remembrance of Allah and performance of prayer and giving; that Allah may reward them [according to] the best of what they did and increase them from His bounty. And Allah gives provision to whom He wills without account. They fear a Day in which the hearts and eyes will [fearfully] turn about.” The implication is on IBBL to turn to the Tawhidi Mission and Vision and its asset valuation implications in the face of the Tawhidi worldview of unity of knowledge entrenched in organic unity of knowledge and the world-system of finance, economics and commerce. Likewise, GCG and GCG(θ) are different concepts. This calls for the contrasting depiction of the two similar yet contrary concepts of Good Corporate Governance. In the case of IBBL’s adoption of GCG there is no difference between the conventional and IBBL understands of Islamic version of GCG. Yet there is difference between GCG in both the conventional and IBBL’s understanding contrary to GCG(θ). In conventional definition, “Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society” (Sir Adrian Cadbury in ‘Global Corporate Governance Forum’, World

A Prescribed Model of Endogenous Inter-causal …

Non-Tawhidi e y as the Episteme

Islamic e Tawhid as the Episteme

Pressure Groups Board Shareholders Regulatory authority Regulatory Authority Non-Management

Execuve Director Management Independ. D Employees Directors

Agents: Customers, Suppliers distributors

Social

Objecve

101

Private

Tawhidi Board as Ulmate Governance Shura: consultaon & discourse General Parcipaon; Stakeholder’ Parcipaon; Community Parcipaon; Automac Transparency & Disclosure Minimal Regulaon needed due to reproducon of unity of knowledge and conscious control leading to Social Wellbeing: Complemenng Private and Social Goals

Fig. 5.2 Comparative views of Corporate Governance: Islam and the other perspective

Bank, 2000).9 IBBL equates this definition with its own, as shari’ah perspective of GCG. There remains the subtle difference of GCG(θ) in respect of the episteme governing wellbeing objective of the Tawhidi foundation of micro-foundation of the macroeconomic outlook of IBBL and its utilitarian perspective of maximization of shareholder’s wealth. The latter episteme arises from the concept of competition in the allocation of resources that permeates the axiom of economic rationality. The episteme of pervasive complementarities and the interactive, integrative, and evolutionary learning worldview of organic unity of knowledge in the Tawhidi methodological worldview establish the full scale of participation and complementarities. The difference between the two sides of Tawhidi and non-Tawhidi basis of definition of GCG can be explained by Fig. 5.2. With the above explanations of the vector {SDG, CSR, GCG}[θ] being commonly induced by unity of knowledge denoted by ‘θ’-value as a quantitative representation of the wellbeing criterion, a more disaggregate list of representative variables can be set up. We maintain the critical variables that IBBL focuses on in its ‘Business Model’ and Strategic Plan with the difference of inter-variable induction by ‘θ’-value. Thereby, 9 Cadbury

(2000).

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5 Objective Functions of Islamic Bank Bangladesh: A Critique of Islamic Economics

SDG(θ) = {human resource development (x1 ), employment creation (x2 ), output to indicate economic growth (x3 ), price to form real output and indicate financial stability (x4 ), poverty alleviation (x5 )financial adequacy as with Basel III (x6 ), environment conservation (x7 ), risk management (x8 ), trade creation (x9 ), economic efficiency (x10 ), equity (x11 )}[θ] = identically to, SDG(θ) = {x1 , x2 , x3 , x4 , x5 , x6 , x7 , x8 , x9 , x10 , x11 }[θ] Likewise, CSR(θ) = {employment creation (y1 ), poverty alleviation (y2 ), environment conservation (y3 ), financial equity and fairness (y4 ), avoidance of interest (riba) (y5 ), financial social inclusiveness in community (y6 )}[θ] = identical to,   CSR(θ) = y1 , y2 , y3 , y4 , y5 , y6 . Some of the y s may be identical with x s. (5.1) GCG(θ) = {productivity (z1 ), efficiency (z2 ), avoidance of interest based business, riba (z3 ), avoidance of socially forbidden activities and choices (z4 ), socially inclusive financing (z5 ), employment creation (z6 ), transparency (z7 ), disclosure (z8 ), environment consciousness (z9 ), Basel III abidance (z10 ), work ethics (z11 )}[θ] = identically with, GCG(θ) = {z1 , z2 , z3 , z4 , z5 , z6 , z7 , z8 , z9 , z10 , z11 [θ]. Some of the z s may be identical with x s and y s.

(5.2)

IBBL does not carry out its Islamic functions in the conscious presence of ‘θ’value because its activities are governed by independently distributed contracts (uqud). Consequently, a ‘Business Model’ of organic inter-causal relations between SDG(θ), CSR(θ), and GCG(θ) does not exist. The macroeconomic model emphasizing economic growth is followed. In the neoclassical macroeconomic modeling this focus of goal leads to resource constraint and thereby substitution between economic growth with efficiency and social inclusiveness. This consequence is not intended by IBBL. Yet it is a methodological result of its ‘Business Model’. IBBL Annual Report 2018 (p. 21) points out the growth-oriented pursuit of her financial activities in the following words: “IBBL has been ceaselessly working to strengthen the economic base of the country since its inception and thereby contributing to country’s GDP.” Yet it is well-known that GDP growth has no relationship with the objective of wellbeing, which essentially plays the central role in the complementary interrelations between the goals of SDG(θ), CSR(θ), and GCG(θ) in terms of their various representative variables and their further disaggregation. The IBBL ‘Business Model’ of financial growth complementing the national focus on real GDP as indicator of economic growth has proved to be a sad experience in the direction of life-fulfillment wellbeing model for the common good. The pursuit

A Prescribed Model of Endogenous Inter-causal …

103

of growth as national goal in which business corporations participate to attain has resulted in Bangladesh being deeply corrupt nation in all its sectors.10 The independently comprised values of shari’ah is an example of disaggregate approach to moral/ethical/social inclusiveness. IBBL is a strong follower of such a disaggregate value model of shari’ah.11 The model of the disaggregate type represents the econometric model of exogenous ethical consideration. We explained this problem of macroeconomic aggregation in econometrics in earlier chapters. Just as the macroeconomic approach of econometrics cannot explicate the endogenous role of morality/ethics in human behaviour, so also IBBL’s ‘Business Model’ cannot explain the true role of Islamic microeconomics in the aggregative model. For example, fiscal expansion as spending is seen as a macroeconomic variable that is spent in activities such as, microfinance and only marginally as charity to alleviate poverty. The micro-entrepreneurial model as opposed to microfinance model, and which in the class of endogenous relational approaches, is not within IBBL’s purview. The proverb goes: “You give a poor man a fish and you feed him for a day. You teach him to fish and you give him an occupation that will feed him for a lifetime.” Microfinance as exogenous fiscal spending variable is macroeconomic in nature. Micro-enterprise is microeconomic in nature. It induces SDG(θ) goal of sustainability of human resource development, empowerment, poverty alleviation, and dynamic life-fulfillment regime of povertycentered endogenous development by inter-sectoral linkages and the complexity of θ-induction.12

10 Transparency

International (2018). shari’ah independently distributed model: (Religion) + (intellect) + (family) + (progeny) + (property). We note that there is no circularity of relations between the component parts in such a utilitarian additive expression. Shari’ah therefore does not invoke the highest watermark of protection of religion (monotheism) in going about calling upon any of the other components without relational linkages between them. Note thereby, that in calling upon the component of property right, IBBL emphasises its shareholding model rather than the ‘Business Model’ of stakeholders’ wellbeing. IBBL raised by shari’ah on financial matters emphasises product development by referring to it as shari’ah compliance. Yet the element of progenitor wellbeing is missed out by ignoring the meaning of intertemporal valuation of present decisions. Indeed, all of shari’ahbased ‘Islamic’ banking has become an exercise in product development. An example of such a case is upholding of Islamic insurance (takaful) without intertemporal pricing of premium. Another example is of waqf (endowment or perpetual charity) in educational institution without examining the relevance of such an institution for grassroots educational development but religious purpose (Azha, Baharuddin, Sayurno, & Salahuddin, 2013). Contrarily, the Tawhidi worldview of monotheism reflected in organic unity of knowledge by inter-causal relations of wellbeing is W(x(θ), θ = f((Religion) × (intellect) × (family) × (progeny) × (property)), approximating to the quantitative evaluation of θ = θW(x(θ)). The evaluation complex system of interaction, integration, and evolutionary learning is explained by the non-linear forms of the inter-causal relations between the endogenous variables of the vector x(θ). The function ‘f’ explains families of extension of the five basic values as shown. A similar causal system model, but by method only and not the methodology of the Tawhidi genre of unity of knowledge, was given by Simon (1957). 12 Barquero (2007). 11 The

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5 Objective Functions of Islamic Bank Bangladesh: A Critique of Islamic Economics

The Market Perspective of IBBL ‘Business Model’ The economic definition of market is process of exchange between buying and selling. This definition ought to be accepted by shari’ah as well. However, it raises a series of conditions for exchange that are confusing and untenable for the sake of profoundness in simplicity. The most problematic one of such conditions that is not to be found in the certainty of bestowal as in the Qur’an (16:97)13 is valuation of expected moral and material felicity to come. Even in the case of the probabilistic valuation ‘nearest to an event point along HH’ the exchange by real possession (qabd) is not the only way of well-determining prices and moral-material embedded reality as values of exchange and exchangeable. In such valuation ‘nearest to an event point’ the monetary and fiscal flows remain closest to each other in the probabilistic sense. Therefore, they are not exactly equal, but ought to close in to near equality. Thereby, neither the general equilibrium of macroeconomics is pursued only in the probabilistic evolutionary learning sense towards full-employment level of output. By the same token market equilibrium remains expectational by virtue of the property of evolutionary equilibrium at the nearest event point along the asset valuation life of HH in Fig. 5.1.14 Continued dependence on macroeconomic perspective of asset valuation and IBBL performance within the Bangladesh national economic framework has caused impossibility of establishing an Islamic monetary system. IBBL operating within a fractional reserve monetary system of Bangladesh Bank without a robust alternative of Islamic monetary system has disabled the successful avoidance of riba from all forms of intertemporal microeconomic approaches to financing. The background shari’ah outlook on monetary matters has never been able to provide an alternative Islamic monetary regime and thereby suggest the greater goal of providing a new financial architecture to International Monetary Fund.15 Thus along with its principal mentor, the IDB, and the following blindly of shari’ah as a compliance basis of its financing modes, projects, and sectors, IBBL has failed to impart any innovative challenge in its human resource development program of IBTRA, despite being a forerunning ‘Islamic’ banking institution globally. The micro-foundation of Islamic monetary theory has remained impossible in the minds of ‘Islamic’ economists, which truly can be the way to the understanding and implementing of an Islamic monetary theory, just as such an intellectual pursuit has been the great contribution of the Austrian School of Economics in this area.16 Along with the fiasco of the fiscal and monetary endogenous transformation much of the great expectations of Islamic change in ummah context have been rent asunder. In this failure the entire gamut of 13 Qur’an (16:97): “Whoever works righteousness, whether male or female, while he (or she) is a true believer (of Islamic Monotheism) verily, to him We will give a good life (in this world with respect, contentment and lawful provision), and We shall pay them certainly a reward in proportion to the best of what they used to do (i.e. Paradise in the Hereafter).”. 14 Burstein (1991). 15 Choudhury (2018). 16 Yeager (1983).

The Market Perspective of IBBL ‘Business Model’

105

adverse consequences has been unbarred comprising advancement of methodological thought of the Qur’an, and its formal applications to markets, economy, science and society. The Great Schumpeterian Gap actually prevails in present times despite its questioning by Ghazanfar17 in the history of economic thought. In the midst of this grand failure since the advent of Islamic banking, the emergence of Islamic development financial institutions like IDB, political institutions like OIC, and the capital surplus Muslim countries, the central features of their yearning for an Islamic world-system got dashed and crumbled. This deepening decadence has continued to destruct the Islamic ideals in collective nation states and their financial institutions. As the years have passed, the withered image of the Muslim World got entrapped in the capitalist globalization agenda succumbed to this converging monolith.18 In the end what we find in the Muslim World by its mental transformation and surrender to globalization is an increasingly complete fading of their identity that otherwise could have been erected in the Islamic worldview with qur’anic depth of understanding and practice in all aspects of the Muslim and other world-system. Where we stand today is what Roy (2006, op cit) rightly calls ‘globalized ummah’ and what Waltham19 refers to as ‘marketplace of the gods’. Indeed, IBBL makes a clarion call for an Islamic monetary system to realize its Islamic future. But the tilts of the mind, thought, subservience, and dismay have thwarted this dream. IBBL instead, like all Islamic institutions carrying the outmoded ideas of shari’ah and its gurus, has changed into a profit-driven shareholding financial institution of Islamic capitalism having offices with collapsing walls. We pray and wish it can be contrary to these ailing realities by conscious transformation into wellbeing ‘Business Model’ under Tawhid as law as substantively explained in its ontological, epistemological, and phenomenological sense. Contrary to such a framework of evolutionary equilibrium arising out of interaction, integration, and learning around the ‘nearest event point’, E(θ), IBBL relents to the mainstream idea of steady-state equilibrium that is embraced by the ‘Islamic’ economists and their mentoring institutions such as IBTRA (IBBL) and IDB-IRTI. Such a theoretical macroeconomic and microeconomic reliance causes errors in the sustainability of investment perspective. The assumptions of optimal and steadystate equilibrium in investment as financial resource allocation deny the embedding effects of moral/ethical values in material choices. Thereby, a competition ‘Business Model’ project-wise, sector-wise entails in the neoclassical utilitarian type of trade-off by substitution between shareholders’ maximization of wealth in the name of financial efficiency by adopting growth-oriented modes of financing on the one hand; and limiting ethical spending. It is therefore difficult to trace out amounts of zakah spending by Islamic banks to account for development finance in povertycentered socio-economic growth. The same state of poverty-alleviation activities by Islamic endowments (waqf) exists in Islamic banks. Much of the literature found in

17 Ghazanfar

(1995). (2007). 19 Waltham (2010). 18 Rodinson

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5 Objective Functions of Islamic Bank Bangladesh: A Critique of Islamic Economics

these areas of charitable spending is in the form of theoretical writings. The data for IBBL on its various modes of financing will be examined later in this chapter. The embedding of SDG, CSR, and GCG by ‘θ’-parameter of unity of knowledge in the Tawhidi context of organic endogenous relations is similarly explainable by Lancaster’s attribute theory of demand.20 Yet the utility implications of Lancaster’s characteristic theory of demand do not abide in respect of θ-induction. That is because the methodology of unity of knowledge in the micro-foundation of resource allocation, as for the case of financial investment, is based on pervasive complementarities between opportunities.21 This negates the postulate of marginal rate of substitution, and the scarcity axiom caused by competition and trade-off. Continuous knowledgeinduced possibilities negates the axiom of scarcity and thereby all of the derivations from the axiom of economic rationality. IBBL’s imitation of mainstream ideas of financial economics in allocation of finances for investment by sectors, projects, and by modes of financing as professed by ‘Islamic’ economics and finance, and complied by shari’ah contra Tawhid as law do not appertain to the sustainability of village and poverty centered development and development financing of microenterprises, or by the wellbeing focus of spending by modes of financing. Islamicization in relations to Islamic banking, Islamic educational institutions, and failed Islamic scholarly outlook has been a deepening in mainstream westernization ideas.22 This misleading frenzy has run the globalized ummah to the bottom.23

Critical Examination of IBBL Data The following tables bring out the limited nature of IBBL financing in the ethical directions of poverty alleviation that could otherwise sustain according to the creation of agricultural sector microenterprises (differently categorised than SME) and knowledge along this line. The tables also point out that, IBBL financing is skewed in the direction of such financing around which the objective of maximization of shareholders’ wealth revolves. In Bangladesh microenterprise can be considered as a way towards poverty alleviation because of the low amount of start-up financing they require and because of their location in villages. SMEs, which are larger than microenterprises abound as well. Therefore, socially inclusive financing for the benefit of microenterprises and rural based poverty alleviation should show up as 20 Lancaster

(1966).

21 In the case of θ-induction in microeconomic sense, investment is disaggregate by projects, sectors,

diversifications, and modes of financing. Besides, in terms of the inter-causalitybetween various investment outlets (i, j), we denote such investment function by, Iij (xij (θ), θ) = ij xij aij (θ) · θbij · {xij (θ)}-vector comprises all morally/ethically embedded material choices in the presence of their interaction, integration, and evolutionary learning by linkages. This expression can next be written in the log-linear form with non-linearity caused by θ-induced coefficients, aij , bij , i, j + 1, 2, …, n. Iij (xij (θ), θ) is a system of circular causation relations of the wellbeing function. 22 Sardar (1984). 23 Roy (2006).

Critical Examination of IBBL Data Table 5.1 Sector-wise general investment, 2016–2017 (percentages of total investment)

Industry (excluding SME)

107 2017

2016

36.26

35.50

Commercial

7.36

7.12

Real Estate

7.00

7.78

Agriculture

2.37

2.50

Transport

1.17

1.23

SME

40.75

30.75

Other

5.00

6.08

Source Islami Bank Bangladesh Annual Report 2017

a recognizable financing margin. Besides, the large segment of financing of industrial projects point to a focus on profit-maximization drive by IBBL. Thereby, the objectives of the IBBL in either the maximization of the firm and social inclusiveness are no different from the conventional pattern of financing. Consequent to the modes of financing we note that up-front profit making by use of murabaha financing opens up critical view on the Islamic legitimacy of such a financing mode. In it the up-front pricing mark-up without having a realization of returns and determination of cost and risk at the time of their occurrence, makes murabaha as mark-up financing to be questionable as a socially inclusive permissible Islamic mode of financing. By the same argument, neither can murabaha be called an Islamic mode of financing nor any other mode of financing that revolve around murabaha be accepted as permissible in the Islamic category of morally/socially inclusive financing. Nonetheless, IBBL and likewise most Islamic banks including IDB that we have seen concentrate their financing in murabaha and the like, such as mega-project financing of sukuk (Islamic bond financing), rents (ijara), istisna (manufacturing and industrial loans on specified projects), bai-muajjal, bai-salam, and quard e-hasana. These modes of financing are all made to revolve around murabaha and marginally only around the truly Islamic modes of financing by mudarabah and musharakah. The murabaha-based financing thereby remains questionable by their riba-like contamination on all forms of pricing (Tables 5.1 and 5.2).

Circular Causation in IBBL Financing of Agricultural Sector, 2016–2017 (Millions of Taka) Table 5.3 gives the financing done by components of the Agricultural Investment. Time series data are not available to evaluate the estimation of wellbeing subject to circular causation relations between the components. Therefore, a content analysis is undertaken here. Table 5.3 when converted into cross-sectional form will appear as shown in Table 5.4 in terms of amounts of percentages as needed.

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5 Objective Functions of Islamic Bank Bangladesh: A Critique of Islamic Economics

Table 5.2 Mode-wise investment 2016–2017 (percentages of total investment) 2017

2016

Bai-murabaha (mark-up financing)

61.67

62.00

HPSM (Hire purchase under shirakat Milek)

22.79

22.64

Bai Muajjal (sale on credit)

8.55

8.82

Bill purchased and negotiations

1.93

2.30

Quard (loan)

2.81

2.28

Bai-Salam (future sale for payment now)

1.48

1.05

Mudaraba (profit-sharing)

0.70

0.81

Musharaka (equity financing)

0.07

0.10

Source Islami Bank Bangladesh Annual Report 2017 Table 5.3 Percentage distribution of components of Agricultural Investment, 2016–2017 Millions of Taka

Percentage distribution

Variables in t = 2016–2017 By projects/regions (i)

Components Crops

2984

25.61

x1i

Fisheries

2374

20.37

x2i

Livestock

3518

30.19

x3i

Irrigation equipment

20

0.17

x4i

Agricultural equipment

62

0.53

x5i

Poverty alleviation

1940

16.65

x6i

0.89

x7i x8i

(4% of sector-wise general investment) Storage

104

Others

650

5.58

Total

11,652

100

Table 5.4 Cross-sectional conversion of surveyed data as in Table 5.3 Inter-project distribution at a given time-period Column vector

x1

x2

x3

…

xn

=x

Projects

x1i

x2i

x3i

…

xni

= {xji }

1

x11

x12

x13

…

x1n

= {x1i }

2 .. .

x21

x22

x23

…

x2n

= {x2i }

n

xn1

xn2

xn3

…

xnn

= {xni }

···

Circular Causation in IBBL Financing of Agricultural …

109

The disaggregate data that can be retrieved from IBBL database will yield the following wellbeing evaluation model of micro-foundation of IBBL’s present macroeconomic aggregate picture. The latter outlook is presented in IBBL’s goal of economic growth, given the trade-off of its financing resources between the ‘Business Model’ of shareholders’ maximization of wealth, which is the same as its own maximization of the value of firm on the one hand; and socially inclusive financing on the other hand. Evaluate (estimate & Simulation)

Wellbeing, W(x(θ)) subject to circular causation relations, xi (θ) = fj (xj (θ), θ), i = j = 1, 2, . . . , n θ = W(x(θ)), quantitative form of the evaluated wellbeing function (5.3)

The method of computation of θ-values corresponding to the given vectors of variables and thereby calculating the average θ-value for wellbeing evaluation purposes was explained in earlier chapters. As the cross-sectional data for the period 2016–2017 shows that, if such persists to be the trend, then weak inter-causality would exist between the various components of Table 5.3. Consequently, empowerment that must inter-relate with poverty alleviation is shown to be weakly related with the empowering complementary relationships between the x(θ)-vectors. The evaluation of the wellbeing function in terms of θ-parameter would show the weak existence of the objective criterion of wellbeing (maslaha) in respect of unity of knowledge by complementary relations between the inter-causal variables. The appropriateness of IBBL’s performance in the true (Tawhidi) direction of wellbeing will be questioned. The continued adoption of shari’ah in the face of such failure would mean the weakness of the shari’ah paradigm in any of its diverse forms.

Conclusion The content of this chapter although exemplified for IBBL as a foremost private sector Islamic bank but presently universally applicable to all Islamic banks bring out certain realities. Their failure points to questioning surrounding shari’ah as juristic practice by the long time span of interpretations of juristic practices claimed to be derived from the Qur’an and sunnah according to sectarian interpretations (madhabi). However, the ontology of the shari’ah as law found in the Qur’an (45:18)24 is itself 24 Qur’an (45:18): Then We put you, [O Muhammad], on an ordained way concerning the matter [of religion]; so follow it and do not follow the inclinations of those who do not know.

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5 Objective Functions of Islamic Bank Bangladesh: A Critique of Islamic Economics

the ‘way’ towards Tawhid. Hence all the artefacts of economic, financial, social, and scientific analysis done must be fully embedded in Tawhid as the law of oneness cast in terms of the moral-material unity of knowledge. This embodies the paired details of all world-systems. Variables representing beings in such a unified world-system by complementarities are the endogenous elements of micro-foundational totality of macroeconomics and of its enabling analytical devise of econometrics. This is the Qur’anic methodological worldview that stands for estimation and simulation in the wellbeing objective criterion. Therefore, according to the mentioned verse, as long as shari’ah as the ‘way’ of knowing unity of knowledge in the universal and unique law of monotheism emanates and ends in Tawhid, and the ‘way’ emulates the ontology of Tawhid, then there is no difference in the substantive meaning between shari’ah and Tawhid as law. In such a case all the qur’anic laws and further derivations from them in reference to the formalism of Tawhidi law in unity of knowledge remain acceptable on both sides. We therefore write for all of the Tawhidi construction of micro-foundation of macroeconomics delineated by the class of analytical (portable ontologies) functions (f(θ, x(θ))) referring to the primal ontology of Tawhid as law (Chap. 1): (, S) → World-System {(θ, x(θ)} = {f(θ, x(θ))} → (, S). In the meaning of the mentioned verse, this entire continuum of knowledge-induced process conveys shari’ah as Tawhid. Yet any law and its interpretation that fails in such identification is a human innovation non-compliant with the meaning and function of Tawhid as law. Shari’ah has failed over the ages in this respect of being unable to stay the task of Tawhidi identification. Consequently, in the field of Islamic reconstruction of micro-foundation of macroeconomics and its use in econometrics that emanates, the continued shari’ah pronouncements and its imitation by so-called ‘Islamic’ economics, finance, science, and society has failed itself in the qur’anic sense and all that engender thereby. The other meaning that arises from the misplacement of shari’ah in all Muslim functioning is the misunderstanding about shari’ah as if this is a law different from Tawhid as law that has to be given precedence on all worldly matters. There can be nothing farther away from the qur’anic truth. In this way the inconsistency between Tawhid as law and the juristic development of shari’ah displacing it from any substantive formal understanding of the ontological foundation has caused the disappearance of creativity and intellection in both the empty credulity of Muslims and its attempt to be immersed in Muslim so-called ‘Islamic’ thought and its institutional following. In the theory of micro-foundation of macroeconomics with complete system of endogenous inter-causal relations the wellbeing formalism replaces most of the Islamic imitation of mainstream econometrics. The dichotomy between fiscal and monetary policies of mainstream macroeconomics and its overall general equilibrium consequences in output, prices, resource use, and employment in both the closed and open economies, have subdued the analytical understanding of ethical endogeneity. Predictability of Islamic futures by such models has failed. Relevant policies have ceased to exist. Incorrect directions and false expectations have been raised in the name of juristic shari’ah (fiqh). IBBL as a member of the class of Islamic banks

Conclusion

111

and their mentorship of IDB-IRTI, and their training institutions have thus followed shadows not reality. In regards to the above meaning of uniqueness of Tawhid as universal law to which shari’ah must submit for its identity, Ibn al-Arabi wrote25 : “Useless knowledge is that which is disconnected from its source and origin, i.e. from the divine reality. Any knowledge outside of Tawhid leads away from Allah, not toward Him. But knowledge within the context of Tawhid allows its possessor to grasp the interconnectedness of all things through a vast web whose centre is the divine. All existent things come from Allah and go back to Him.” This means that not only the ontological beginning and end of existence is premised in Tawhid (monotheism), but also the ‘way’ derived to reach these ends is uniquely and universally driven by Tawhid. In the case of the micro-foundation of macroeconomics in Islamic methodological worldview the place of shari’ah as jurisprudence and its interpretation (fiqh) as far as this is derived by human inclinations for time immemorial, has never referred to this qur’anic verse to identify shari’ah with Tawhid as the law of ‘everything’. In the end, what should be a blueprint of micro-foundational evaluation and predictive directions for Islamic banking under the inter-causality dynamics of complementarities of choices in the Tawhidi light of unity of knowledge? Here is a proposition for such a blueprint based on the centrepiece being the wellbeing objective criterion. The growth target is not the main one. It is a derivative and a propeller of the wellbeing objective in the sense of interactive, integrative, and learning organic interrelationship that endogenously unravel at the micro-foundational level. In Fig. 5.3 double arrows denote inter-causality between the component variables of the wellbeing objective criterion in unity of knowledge. The arrow denotes continuity of the wellbeing objectified sustainability.

25 Chittick

(1989).

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5 Objective Functions of Islamic Bank Bangladesh: A Critique of Islamic Economics 1.

Financing bymicroeconomic aggregates of sectors in sectors in outputs and inputs

2.

Modeling forworkability andpredicatbility

3. Formalism and applicaon Focus on Wellbeing As objecve criterion For arculang the Tawhidi methodology

1.

creavity and instuonalpolicy and reflexivity regulatory framework at micro-foundaon of projects and sectors Sustainability

Ontologically driven in Tawhid

Policy simulaon 2. Human resource development

evoluonary learning

3. Research & Development 4. Discursive venue

Fig. 5.3 A snapshot of blueprint for IBBL (Islamic Banks and IDB) ‘Business Model’

References Azha, L., Baharuddin, S., Sayurno, & Salahuddin, S. S. (2013). The practice and management of waqf education in Malaysia. Procedia-Social and Behavioural Sciences, 90, 22–30. Barquero, A. V. (2007). Endogenous development, theories and policies of territorial development. Investigaciones Regionales, 11, 183–210. Burstein, M. (1991). History versus equilibrium: Joan Robinson and time in economics. In I. H. Rima (Ed.), The Joan Robinson legacy (pp. 49–61). Armonk, New York: M.E. Sharpe, Inc. Cadbury, A. (2000). H:\ALL\RESEARCH PAPERS\Corporate Governance and Food Price papers\Corporate Governance Definitions.htm. Chittick, W. C. (1989). Sufi path of knowledge. Albany, NY: State University of New York Press. Choudhury, M. A. (1987). Microeconomic foundations of Islamic economics as a study in social economics. American Journal of Islamic Social Sciences, 3, 2. Choudhury, M. A. (1988). The conflict between efficiency and equity goals in manpower economics. Forum for Social Economics, 17, 2. Choudhury, M. A. (2018). Comparative Islamic perspectives in money, monetary policy, and social wellbeing. Journal of Economic Cooperation and Development, 39(1), 143–162. Ghazanfar, S. M. (1995). History of economic thought: The Schumpeterian ‘Great Gap’, the ‘lost Arab-Islamic legacy, and the literature gap. Journal of Islamic Studies, 6(2), 234–253. Hammond, P. J. (1989). On reconciling Arrow’s theory of social choice with Harsanyi’s fundamental utilitarianism. In G. R. Feiwel (Ed.), Arrow and the foundation of the theory of economic policy (pp. 179–221). London, England: Macmillan. Harsanyi, J. C. (1955). Cardinal welfare, individualistic ethics, and interpersonal comparisons of utility. Journal of Political Economy, 63. Islamic Bank Bangladesh Limited. (2019). Annual Report 2017. Dhaka, Bangladesh. Kaku, M. (2015). Consciousness—A physicist’s viewpoint. In The future of the mind, Chapter 2. New York, NY: Anchor Book.

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Lancaster, K. J. (1966). A new approach to consumer theory. Journal of Political Economy, 74(2), 132–157. Lozano, J. M. (2002). Organizational ethics. In L. Zsolnai (Ed.), Ethics in the economy, handbook of business ethics (pp. 165–186). New York, NY: Peter Lang. MacPherson I. (n.d.). Patterns in the maritime cooperative movement 1900–1945. Acadiensis. Retrieved May 22, 2019, from https://journals.lib.unb.ca/index.php/Acadiensis/article/viewFile/ 11395/12145. Rodinson, M. (2007). Islam and capitalism. London, England: SAQI Books. Roy, O. (2006). Globalized Islam, the search for a New Ummah. New York, NY: Columbia University Press. Sardar, Z. (1984). Islamisation of knowledge, or the Westernisation of Islam? Inquiry, 1, 7. Simon, H. (1957). Models of man. New York, NY: Wiley. Transparency International. (2018). Corruption perceptions index 2017. Retrieved March 6, 2018, from www.transparency.org. Waltham, L. (2010). Marketplace of the Gods, how economics explains religion. Oxford, UK: Oxford University Press. Yeager, L. B. (Spring, 1983). Stable money and free-market currencies. CATO Journal, 305–326.

Chapter 6

The Meso-Economics of the Wellbeing Criterion

Abstract The theory and application of wellbeing are substantively different from those of welfare of the neoclassical and social choice theory. The concept of wellbeing has the wider implication in constructing models of social contract out of serious consideration of moral and ethical issues in social construction and development. Yet wellbeing is neither an exclusively microeconomic nor a macroeconomic concept. That is because the individual is considered in respect of his potential within the interactive social milieu. The theory of wellbeing in its multidimensional humancentered development perspective is studied in terms of the human capability and its functioning approach (CF) for attaining or failing to attain human development as human potentiality. The CF-theory has been advanced in the light of Amartya Sen’s learned contribution to this field. In this chapter the CF-theory and its comparison and contrast with the social choice and utilitarian theory of the neoclassical type of welfare criterion is critically examined. Other critical approaches to the study of human wellbeing, as in the case of Islamic theorizing, are examined. Arising from such critical studies the different yet all comprehensive formalization and application of the wellbeing concept is propounded in the form of an analytical model premised on epistemic and ontological foundations of unity of knowledge. This approach treats human wellbeing as being interactively integrated with the physicalist and non-physicalist domains comprising the interaction between capabilities and functioning towards sustaining the moral worldview of a unique and universal law. It is the monotheistic law of unity of knowledge called Tawhid that forms the cardinal foundation of Islamic methodological worldview. An empirical explanation of the emergent model of the wellbeing criterion in the methodological framework of Tawhid is provided to establish the ontological, epistemological, and phenomenological properties of the corresponding meaning of the wellbeing criterion in its epistemic sense.

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2020 M. A. Choudhury, Islamic Economics as Mesoscience, https://doi.org/10.1007/978-981-15-6054-5_6

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6 The Meso-Economics of the Wellbeing Criterion

Introduction The pursuit of goals like economic growth and development, the dichotomy between microeconomics and macroeconomics, and economic welfare contrary to socioscientific concept of wellbeing integrating all branches of sciences by a cogent theory of oneness has not been developed in the literature. Yet such a robust study of analytical oneness premised on strong methodological groundwork is as seriously required for the changing world-system of economic and social turbulences today as is the shift of science as process by its general unified theory of unity of being and becoming. Yet the current state of economic and social theories has not matured sufficiently to investigate such a real phenomenon even though this methodological approach projects itself as the unique issue of the new ontological discovery. This chapter continues along the line of arguments in this entire treatise that, there is only one theory that explains the entire universe in its generality and particulars with distinctions being only in the issues and problems, not in the attenuating unique methodology. This book as also this chapter premises the methodology of the universal primal ontology to be unity of knowledge. This ontological premise emanates from the analytical understanding of monotheistic oneness in the realm of Islamic socioscientific philosophy. It then translates into the phenomenology of quantitatively applied applications and persists over knowledge, space, and time dimensions. These sequential properties of the unique methodology of oneness are most soundly studied with analytical rigour in the quantitative formalism of the socio-scientific wellbeing criterion. Demise of the concept of welfare function in neoclassical utilitarian economics (Harsanyi, 1955) and in the social choice theory of Arrow (1951) and Sen (2002) has led to the rise of the concept of wellbeing in terms of human development. Within this latter concept, Sen’s (2010) contribution to the theory of human capability and functioning (CF) as the foundation of the index of human development presents a multidimensional view of development in human-centered epistemological sense. Consequently, poverty alleviation as a development ethical goal, can be viewed as a development choice governing certain acquired possibilities that must be at the disposal of target groups of the poor. Among these are the availability, distribution, and ownership of productive resources, income generation, security of health, human resource development, commodities, social awareness and discursive participation— all the means towards attaining developmental capabilities as functioning. Thereby, the capability in the form of owning a stock of accumulated human resource/human capital influences diversely the functioning as choice of experiential living in target groups of individuals. Thereby, the social influence of such CF bundles reflects on the adopted pattern of human development (Clark, 2005). An example of such a social consequence of a particular holding of CF is of the Canadian Aboriginals, who have their traditional ways of living and choices with which they remain happy and more enabled. Yet such a model of CF defining their wellbeing does not comply with the CF of industrial Canada, which predominates.

Introduction

117

The result has thus been exclusion of the rich Native heritage in the materially abundant and rewarding façade of industrial Canada (Mendelson, 2004). Another example of an exclusive and differentiated effect of CF in development paradigm is the case of the Muslim World. Muslims of the contemporary age have been dismayed in their prevailing development trajectories by two contesting views of life (Al-Azm, 2014). Firstly, there are those who surrender themselves to religious ritualism. They consider realization of Islam as being shaped by a disparate belief in self, social, and global identity. This worldview is opposed to the model of civil society of neoliberalism. On the other hand, in the Muslim World there are the Muslim elites who press for the secular model of Occidentalism. There is yet a third group that seeks for its identity in an undefined assimilation of Islamic and secular ways of geopolitical state. Within such a prescriptive model of social change are the fields that have come to be called ‘Islamic economics’, ‘Islamic finance’, and also a distant cry of ‘Islamic science’ (Nasr, 1987; criticised by Sardar, 1984, 1988). This group has for all times marked the wishes and designs of the elitist Muslims in their claim for the Islamic law, the shari’ah. Yet for instance, the phenomenal rise of Islamic banking was totally based on the motivation of rich shareholders’ in the first place. It does not carry a stakeholders’ model of development change (Ahmad, 2017). The continued imitation of the shareholder model from mainstream economic and finance perspectives can be understood by the underlying trend in the Islamic banking Finance/Deposit ratio (FDR). Statistical facts show that FDR has exceeded 100 per cent ratio. The obvious inference that can be drawn from this trend is that rich shareholders finance in excess of the 100 per cent ratiothan what is done by common depositors. Thus Islamic banks are made up of privileged rich shareholders’ funds. A shari’ah misunderstanding of such self-benefitting shareholders’ interest through Islamic banks and financial institutions over the years could not present a true and practising worldview of Islamic economics, Islamic finance, and Islamic banking. A true Islamic intellectual background and its institutionalism could not contribute anything valuable by theory and practice to the world of learning and application. Only financial growth mattered as anything to the so-called ‘Islamic social and economic’ amplification. The prevailing subservience of such Islamic institutions to a confused understanding of the relationship between Islam and the civil order of capitalism has given rise to a failed experiment on Islam otherwise to be as a resilient world-system (Rodinson, 1973). Such an unsettled comprehension of Islamic transformation within the Muslim World has caused problem of lack of understanding the precept of the wellbeing criterion and its implications on human development and social change. In this respect, we can examine the following problem of the lack of well-definition of the wellbeing criterion in the global Muslim fold.

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6 The Meso-Economics of the Wellbeing Criterion

Failed Understanding of the Wellbeing Concept in the Muslim World In the present state of Muslim World development, particularly of the Middle East, the world noted the inner dynamics of the Arab Spring as a violent opposition between the above-mentioned three shapes of the political economy of change (Al-Azm, Chap. 12, 2014; Choudhury, 2011a). Now with the eruption of ISIS under the Muslim Salafist/Wahabi movement, this violent event is seen to be marking the future directions of change in one way or the other in the Middle East Muslim countries and elsewhere. Thus while the resource and commodity capabilities exist in the nations and people at large in the Muslim World to determine its future politico-economic trends in secularism or Islam, yet the question of the functioning of such commodity choices to realize the shape of the political economy of destined ownership and self-determination remains unresolved. The enabling bundle of diverse but opposing potentiality in human development and social wellbeing deepens the problems of the CF approach in the wellbeing concept. The question then remains: Can coexistence arise from the continuing contest between the three opposite groups and their discontents in the Muslim World?

Objective The objective of this chapter is to develop a model of wellbeing that will establish the foundation of development study and political economy on the epistemic basis of unity of knowledge. We raise the questions: Can secularism and the competing and opposing views of politico-economic approach to Muslim idea of development provide the needed epistemic model of unity of knowledge for the wellbeing criterion? What other prospect exists that can offer an epistemic alternative that can explain wellbeing in terms of unity of knowledge between the variables of CF in the wellbeing function? Can such an alternative approach to a greater depth of meaning of wellbeing and human development in the presence of CF offer an analytical and policy-theoretic worldview as a universal and unique contribution to global intellection in socio-scientific inquiry? What would be the features of such an analytical model in relationship to its methodological and applied worldview?

Literature Review Other than the work of Amartya Sen on the concept of wellbeing differently from the traditional neoclassical and social choice concepts of welfare function, not much has been done on an analytical development of the theory of wellbeing. Recently there

Literature Review

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was a work by Binder (2010) on an evolutionary theory of welfare with dynamic preferences that can address learning and sustainability. In the field of Islamic economics there is the solitary work by Naqvi (2003). But this writing can be critiqued on substantive analytical grounds.

A Critical Review of Sen’s CF-Theory of Wellbeing A critique of Sen’s and other contributions to the theory of wellbeing in respect of CF and human development follows. This author then further develops his own contribution to wellbeing theory in the perspective of the episteme of unity of knowledge. Sen’s CF-theory is a monumental contribution to the theory and practice of economic development. Yet scholarship is like the tree that succours the environment in its stately growth as it rises to splendour. There always remains in it the vigour to span into richer branches with life-inducing effects. So also there is the fecund possibility in Sen’s wellbeing theory of CF for deeper epistemological investigation based on unity of knowledge that is derived from beyond mere human-centered and individual-centered meaning of CF in wellbeing (Sen 2003). Besides, in our example given above regarding the lack of definition of wellbeing in the confused state of the future of the Muslim World in its deluge of misdirected paradigms, the group-specific self-seeking individuated objectives in such separable groupings bedevil the use of the holistic wellbeing theory, and thereby the theory of CF. On the inherent premise of rationalism leading into aspects of human-centered rationality axioms Sen’s theory of wellbeing in CF and human development and the Muslim perspective can thereby be argued not to be premised in a methodological worldview of universality and uniqueness implicating the concept and practice of the wellbeing criterion. An inconsistency problem is found to be as deeply rooted in Sen’s theory with respect to the field of political economy of development; as has been the case of the impossibility theorem and the axiom of irrelevant preferences in Arrow’s theory of social choice. A dictatorial situation is the natural necessity of either the wellbeing or the welfare approaches when transitivity of choice otherwise fails to determine the ordering of CF and the social welfare function (Sen, 1977). Within this failure of the transitivity axiom of economic rationality explained by a view of CF-theory, the existence of irrelevant preferences must necessarily annul inclusive social preferences. Inclusive social preferences therefore, cannot be defined by the utilitarian addition of independent individual preferences and utility functions of optimal utilitarian choices. Indeed, Sen’s (1970) negation of the axiom of transitivity axiom as the ideal of the ‘rational fool’ means much in terms of a reasoned rejection of neoclassical idealism. But the continued existence of a utilitarian pattern of aggregation of individual preferences, choices, and utilities based on the multidimensional interplay between capability and functioning results in idealized characterization of the wellbeing criterion.

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In the formation of social contract such additive utilitarian type utilities, and thereby capabilities and functioning result in idealized good society as was once conceived by Aristotle (Aristotle trans. Welldon, 1987). In terms of this concept of ethicality individually optimized, an idealized good society is construed by the additive utilities of utilitarian ethics (Quinton, 1989). Such a social construct with individual centric concept of wellbeing is also found in Rawls’ (1971) concept of ‘primaries’ describing a bundle of Utopian impossibilities (Wolff, 1977). Now with indeterminacy abiding on opposite sides of the criticism on idealism of social welfare criterion of social choice and neoclassical economic theory; and yet again a multidimensional explanation of interaction between capability and functioning of individual human-centered wellbeing, no precise characterization of the human development problem has been possible. Complex multidimensional interaction between capability and functioning cannot be explained by utilitarian aggregation of optimal utilities of individuals. As well as the utilitarian objective of welfare and wellbeing cannot be of the optimal and steady-state nature in the midst of evolutionary learning processes of a probabilistic world-system and its problem defining variables. Rather, complex social aggregation of preferences and choices in multidimensional state of interaction take up nonlinear forms of dynamic learning and evolutionary forms. They are not governed by individual human-centricity as of Sen’s wellbeing criterion. In all of the ethically induced welfare and wellbeing theories, despite much effort in substantiating the indispensable role of ethics in social inclusiveness, the ethical parameter could not be enumerated in an analytical form of any economic function to derive policytheoretic inferences on attaining the wellbeing criterion. Morality and ethics, and thereby consciousness enumerated as degrees of embedding in systemic worldview of physicalism and non-physicalism domains, have forever remained exogenous variables in a comprehensive understanding of social wellbeing taken in its wider sense of moral and ethical valuation (Myrdal, 1957). Yet such a substantive formalism invokes a deep import. That is endogenous treatment of morality and ethics in social choice and wellbeing are absolutely unavoidable in formalizing the wellbeing criterion and its development consequences in a probabilistic evolutionary learning socio-scientific world-system.

Problems of Islamic Wellbeing Formalism The so-called field of ‘Islamic’ economics and finance has suffered its deepest cut of all by being unable and only philosophically rationalistic (Qadri, 1990) in its understanding of the critical issues that this field primarily ought to explain. These are the precepts of Islamic monotheism as primal ontology, and the premise of social justice, fairness, equality, compassion, and likewise the good things of life as choices that most ‘Islamic’ writers would like to center around the cardinal law of monotheism (Tawhid).

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Naqvi (op cit) tried to configure his idea of ‘Islamic’ axiomatic worldview upon such self-concocted principles. Yet he treated them as ‘basis’ vector (Gel’fand, 1961) for describing the ‘Islamic’axiomatic base. Serious questions remain: If Naqvi’s axioms form a ‘basis’ vector then every element of this basis is independent of all other ones. Consequently, the critical ethical elements independently affect the world-systems, such as economics, finance, science, society; and the variables of the wellbeing function. Such an exogenous effect of the ‘basis’ vector leaves the Islamic world-system dysfunctional in the sense of systemic interaction, unity of knowledge, and thus learning and creative evolution according to the primal ontology of Islamic monotheism as the Law and its organic construction of the generality and particulars of the world-system. The framework of inter-causal unity of being and becoming between the variables representing good things of life in the wellbeing function is denied. The other major problem with the selected enumeration of edicts of morality, ethics, and values in Islamic identification is that these are done as individually desired. In fact, there is no limit to the full extent of such enumeration of values that one can derive from the Qur’an as the ontological foundation of the Islamic worldview. Therefore the question is, which one of these values can be relied upon to be authentic? There is no convergence to a standardized set of values1 that can be pointed out. Thereby, the principles of uniqueness and universality cannot result from Naqvi’s axioms in the midst of random enumeration of values. In so many other works of ethics and values in Islamic context (Chapra, 1985), the use of the terminology ‘welfare’ as opposed to ‘wellbeing’ in analytical sense belonging to disparate epistemic reasoning, has permanently and erroneously hindered any creatively erudite contribution to the world of learning. Thereby, any economic conception so arising has continued on in the flawed framework of neoclassical utilitarianism or absence of analytical theory in so-called ‘Islamic’ socioscientific inquiry. Facing such a gap in scholarly maturity, ‘Islamic’ economics could not therefore erect a methodological worldview. ‘Islamic’ economics never could derive its methodological emergence from the epistemic centricity of Tawhid in a

1 As an example the problematic set of Islamic value enumeration for reasons as mentioned above are

shown as a basis vector by Naqvi in terms of (i) Unity; (2) Equilibrium (al-adlwa al-ihsan); (3) Free will (ikhtiyar); and (4) Responsibility (fard). The problem of enumeration, randomness of limiting principal axioms of morality, ethics, and values; and of the disability of such basis vectors to describe the organically learning and unifying world-system in its generality and particulars can be readily noted. Tawhid, which is the primal ontology of any and everything that is truly Islamic vis-à-vis the Qur’an and the Prophetic guidance (Sunnah) ought to govern and be learned by deepening discourse. Such an experience leads into increasingly evolutionary learning processes across the generality and particulars of the world-system in its multidimensional issues and problems explained by the episteme of unity of knowledge. Yet by one’s own arbitrary self-choice of Tawhid as a variable of Naqvi’s basis vector mentioned above, Tawhid loses the attribute of its evolutionary epistemology related to Tawhid, self, world, and the Hereafter. Consequently, all meanings of consciousness (phenomenology) of meta-science are lost in respect of the intrinsic organic inter-causal relations that must exist between all the attributes. There is no end to the enumeration of such attributes.

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description of a pervasively evolutionary learning world-system with complementarities signifying unity of knowledge as this emanates from the Tawhidi (monotheistic) methodological worldview. Yet the same kind of analytical consequences can be read off the special case of complementarities between capability and functioning with multidimensional development possibilities. When the principle of sustainability in development ethics can be explained in such complementary ways, the emergent theory would present a novel epistemic inquiry premised on unity of knowledge. The emergent model would be explained together with the contrary evaluation of the wellbeing criterion with marginalist trade-off between states of capabilities and functioning based on bundles of commodities. In the human-centered reasoning of Sen’s CF-theory otherwise, marginalism is possible. In the end, although so much desired, ‘Islamic’ economic and social inquiry failed to render a unique and universal theory of morality, ethics, and values. Contrarily, the methodological worldview of unity of knowledge presented in this chapter explains endogenous yet discoverable, inferential, and attainable simulated states of complementarity. Such immanent complementary and participativestates of organic unity of being and becoming convey the foundational ontology of unity of knowledge by the methodology of Tawhidi (monotheistic) organic inter-causal relations.Such a phenomenon is explained by the primal ontology of Tawhid (monotheistic oneness) in terms of its functioning in the multidimensional world-system, and in relationship with the Closure Event of the Hereafter. The Hereafter in Islamic terminology is referred to as the Great Event in terms of the Closure of evolutionary learning in an unbounded knowledge-space. The ultimate answer to the question of unity of knowledge in terms of endogenously embedded and extendible relations by organic complementarities between multivariate selections of life-fulfillment possibilities has remained unknown to ‘Islamic’ economists. Nonetheless, such is the methodological worldview that continues on to be searched for. Examples of such dynamic regeneration by functional transformations in commodity space in economics are given by the works of Sraffa (1960) and endogenous growth theory of Romer (1986), and to an extent by Sen as well in his transformed form of the wellbeing theory by means of needed complementarities between capabilities and functioning to attain sustainable development.

Space–Time Concept of Evolutionary Wellbeing in the Literature Evolution almost exclusively in all of socio-scientific inquiry in western perspective has been understood in the space–time context (Hawking & Mlodinow, 2010). Thereby, in the case of a theory of evolutionary wellbeing/welfare function time as been used as the factor causing change and continuity. In the same space–time concept, space too is the consequence of every form of cognition and observation

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occurring in time. Einstein (1954) referred to such a concept of space with matter within the space–time concept that cannot be empty of materiality in the sense of physicalism. This sense of the universe being limited within physicalist materiality raises the question regarding the ultimate meaning of life after death for and with which the ponderable mind raises the greatness of life for a life beyond life (Hereafter) in non-physicalist real space.2 Wellbeing denotes the totality of blissful purpose whose deontological consequences extend from life to life and beyond life. The balance, purpose, and coexistence of living experience are the attributes of wellbeing in its conception of extension beyond time (temporality) and space (cognition and materiality), thus consciousness (Kaku, 2015). Contrarily, the concept of social welfare has always been contained within precincts of utilitarian hedonism despite criticism of some of its assumptions of rational choice (Kahneman & Tversky, 1979; Kahneman 1999). Welfare function has been studied in the macroeconomic framework by Gordon (1967). Yet macroeconomics does not yield any behavioural and reasoned dynamics of morality and ethics in its constructs. Besides, the neoclassical utilitarianism of welfare concept in social choice theory could not liberate itself from the roots of civil libertarianism. Civil libertarianism is additive utilitarianism of neo-liberalism kind. Wellbeing function on the other hand is construed as a criterion of individual happiness. It is thereby of the microeconomic essence. In either the microeconomic or macroeconomic conceptions of attaining potentiality, such as increasing consumption of bundles of diverse commodities as fetish, there remains the limiting materiality of such criteria within the space–time concept. Thereby, the premise of such space–time concept of wellbeing and welfare appears and is constrained by the episteme of rationalism. From this primal rationalist foundation of moral, ethical, individualist, and social economic reasoning the concept of economic rationality and rational choice assumes its specific definition of transitivity of choices, full-information, and perpetual competition behaviour caused by resource scarcity. The concept of evolutionary wellbeing under condition of continuity and process is aligned to space–time dynamics alone. Thereby, the changing nature of wellbeing, preferences, choices, and dialectical processes has no roots in the epistemic principle of knowledge as the foundational determinant of inter-causal evolution by knowledge-induced change, continuity, and sustainability. Thus, whether in the a temporal case, as of neoclassicism and utilitarianism, or over time as in the intertemporal case, the nature of the wellbeing criterion remains unchanged. It is to reinforce the fundamental nature of behaviour, choices, and the assumption of resource scarcity that determine the material and cognitive attributes of the wellbeing/welfare criterion. The understanding of the evolutionary learning process-oriented methodological worldview and continuum is impossible in the sheer space–time concept of the rationalist episteme.

2 Thomas

Gray, 1870–71. Elegy Written in a Country Churchyard: “The paths of glory lead but to the grave”.

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Concept of the Wellbeing Function in Space–time Structure of Economic Reasoning In formal expression the evolutionary wellbeing function in space–time concept is defined by the expression,  W(u0 (x, t)) =

T

Wt (ut (x, t))∗ exp(−δ(t))dt;

(6.1)

0

Bold symbols denote vector. The present-valuation formula of discounted (discount factor δ(t)) future wellbeing functions being dependent on time distributed utilities (ut (x,t)) is an example of such a wellbeing function. Contrary to the time discounted definition of the wellbeing function, there is the terminal valuation of future independently distributed wellbeing functions. This takes the form, W0−T,x (u(x, t)) = aT (xi) W(u(x, t)), all variables being time − dependent. (6.2) The role of time in both expressions (6.1) and (6.2) in space–time structure of valuation of wellbeing is to read the shape of the utility function in terms of {x(t)}-consumption variables that define the time distributed utility functions. Time is thereby a reader not a factor of states of the wellbeing functions and their space– time distributed change in the two cases. Besides, the {W(u(x,t))}-functions must be well-determined over time to be evaluated. But this is an impossible task of futuristic forms, unless rational expectation hypothesis attributes of adaptation in information flow are assigned exogenously (Minford & Peel, 1983). In evolutionary learning processes across knowledge, space, and time dimensions simulation remains continuous and abundant. Consequently, the probabilistic expected value of the wellbeing functions in terms of the inner variables in expression (6.1) and (6.2) remain indeterminate by complexity. The problem of evaluation of wellbeing remains unresolved in continuous simulacra of possible alternatives at various points of time. This is a permanent problem of simulated valuation in the space–time structure of the wellbeing criterion with complexity under evolutionary learning processes. In the above characteristics of the intertemporal wellbeing functions two other problems arise that annul all ethical relevance in intertemporal allocation of resources. Firstly, the nature of marginal substitution between competing alternatives of {x(t)} prevails, even if any of these (e.g. goods) remains constant in respect of the other, which is variable (e.g. money). Secondly, the neoclassical theorem of one-to-one correspondence between utilities and preferences implies that, all futuristic nature of constant or time-adaptive hedonic utilities will simultaneously keep given preferences to be fixed or adaptive of the hedonic nature. Evolutionary learning processes over simulacra of evaluation of wellbeing functions, subject to their inter-variable

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causal relations, thereby do not exist in the space–time structure of decision-making and behavioural dynamics of mainstream economic theory.

The Concept of Evolutionary Wellbeing in {Knowledge, Space, Time} Dimensions Now abandoning the concept of wellbeing criterion of the rationalist human-centered idea of morality and ethics in space–time concept of development requires an epistemic shift that is solely premised on unity of knowledge (Wilson, 1998). The simulated world in its ontological generality from which is derived the particulars of functional ontology as designs of a transformed world-system yields the methodological and applied form of the wellbeing criterion in the knowledge, space, and time dimensions. This idea is of a singularly revolutionary kind in the history of socio-scientific thought (Kuhn, 1970).3 The resulting conception of the wellbeing criterion that is premised on the primal ontology of unity of knowledge as law, as in the monotheistic systemic meaning of oneness (Tawhid) by organic interrelations, brings out its applications at each step of the model formalization. In this way, the methodology of the unique and universal law of unity of knowledge premised on the primal ontology of monotheistic oneness is shown to apply cognitively at every point of the theory of wellbeing criterion, its formulation, and its application all along the continuity of the knowledge, space, and time trajectory. Likewise, the emergent wellbeing criterion, which is premised on the methodology and application of the primal ontology of unity of knowledge followed by the derived epistemological and phenomenological constructs, is also capable of explaining the rationalistic epistemological origin and nature of the earlier mainstream wellbeing concepts of space–time genre.

Amartya Sen’s Wellbeing Form in CF-Theory in Terms of Pervasive Complementarities So far this chapter has argued that, only Amartya Sen’s theory of wellbeing in human development in respect of capabilities, commodities and functioning gives the possibility of pervasive complementarities between C & F. But CF-theory also explains the case of marginal substitution between C and F in the adverse condition of neoclassical postulate of rationality in human development. Sen also points out that,adverse development problems occur when there exists conflict between opposites (marginal rate of substitution) as of C and F. Good alternatives for human development and 3 Thomas

Kuhn (1970, p. 152) writes: “… scientific revolutions are here taken to be those noncumulative developmental episodes in which an older paradigm is replaced in whole or in part by an incompatible new one”.

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wellbeing are to be found in the case of sustained complementary relations between C and F. However, the critical problems with Sen’s CF-theory are firstly, its macroeconomic nature. Consequently, no easy method of aggregation of individual wellbeing, non-linear though, has been suggested to invoke social and economic policy implications and social choices of bundles of commodities that together would enable complementarities between C and F for the better perspective of sustainable wellbeing. Secondly, the continued dependence on human rationalism as epistemology develops random scenarios of relations between C and F in the wellbeing function. The result of such rationalist epistemological dependence deprives CF-theory in searching, discovering, and sustaining the golden prescription of complementarities by unity of knowledge. Such possibilities are sustained in continuum by the choices of bundles of goods and their use in attaining complementary CF-scenarios along the path of evolutionary learning processes. The random choices of commodities and utilities based on the episteme of rationalism as earlier explained by expression (2) fail to direct wellbeing and development along the direction of an organismic historical path of sustained continuum. Such a path would otherwise result in methodological universality, uniqueness, and consciously applied futures of reconstructive worldview of unity of knowledge. The emergence of the revolutionary socio-scientific shift at the ontological, epistemological, and phenomenological levels of knowledge embedding in variables are not to be found in all of mainstream economic reasoning—indeed in all of science. The entrenchment of the rationalist idea of heteronomy persists (Bhaskar, 2002).4

The New Methodological Worldview of Wellbeing and Development Future with the Episteme of Unity of Knowledge Figure 6.1 outlines the universal and generalized ontological design of socioeconomic development. Within the stated methodological worldview the unique objective criterion of wellbeing and its analytical properties pervade, based on the emergent episteme of moral and ethical sustainability across inter-relational history of the future, as premised on unity of knowledge concerning events. Events are described along the evolutionary learning processes as, E(θ) = E{θ, x(θ), t(θ)}; θ ∈ (, S) by means of the mapping from the primal ontology  as,  → S {θ}. Thus, {θ} ⊂ S(). {θ} denotes a set of knowledge-values of unity of knowledge that is continuously differentiable and evolutionary as learning processes derived from the nature and implied methodology of the derived discursive space of action of the primal ontology denoted by S(). Besides, S() ⊂ . Therefore, 4 Bhaskar (2002)

wrote on heteronomy: “So long as there is any element of heteronomy, any unfulfilled intentionality, any attachment, any fixation within you, your freedom will be to that extent restricted”.

The New Methodological Worldview of Wellbeing and Development Future …

H

127

H

History of connuum of events in manifold of moral possibilies from the Beginning to the End6

[

S:(

0 1 2 3 Recall: 4 5 ,S):[{ } {x( )}]t( )= E( )={ ,x( ),t( )} W: W(E( )) connuity of IIE processes Across the manifold of knowledge, space, me dimensions unl the Great Event of the Hereaer (inter-systemic Learning processes (IIE) Evaluaon (esmaon and simulaon) subject to circular causaon inter-variable relaons: (intra-systemic interaction, integraon,evoluon) xi( ) = fi( ,x( ),t( ); i j=1,2,..,n in x( ) = {x1,x2,..,xn}[ ] t( ) as me in connuous cognive, measured sense of meseries or surveys, finally to the quantave applicaon of the wellbeing funcon, = F(x( ),t( ))

Gen era li t y ( e.g . ‘ ever ythi ng’, m ul ti ve r se ) Parcular (economics, society, science)

Fig. 6.1 TSR: The universal and unique grand design of Tawhidi Epistemic Relations in Wellbeing

{θ} ⊂ S() ⊂ . Furthermore, because of the continuously sustained evolutionary nature of learning processes {θ} in S() ⊂ , the universe of {θ} is probabilistic in simulacra. Therefore, there exist probability limit points like, θ = plim{θ} across HH(θ). Furthermore, the methodology of organic unity of knowledge derived from the primal ontological origin, (, S), reflects itself universally and continuously over the sustained event-space. Therefore, the knowledge variable denoted by ‘θ’ is the result of inter-causal learning by organic interrelations between the ‘θ’-values and their embedded socio-scientific variables. The functions of such variables, f(x(θ)), can be vectors, matrixes, tensors and cognitive manifolds. The simulacra of evolutionary processes in continuum of events are sustained over time along bundles of various trajectories {HH(θ)}. Time is the creation of the primordial instantiation by primal ontology, and cognition, psychology, and occurrence of events. The result of such dynamics occurring via interaction (discourse) leading to integration (consensus), leading to evolution (sustainability and continuity over the manifold denoted by {θ, x(θ), t(θ)}), marks every point of History, HH(θ) and its prototypes in Fig. 6.1.

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The conjoint properties of the event-space over the historical trajectory of evolutionary learning processes yield the following results: E(θ) = {θ, x(θ), t(θ)} →w W(θ, x(θ), t(θ)).

(6.3)

W(..) is the conceptual, not the quantitative form of the wellbeing function. The wellbeing criterion is now explained in terms of degrees of complementarities (participation) between the knowledge-induced variables as derived discursively from the primal ontological premise and continued on functionally across simulated events in knowledge, space, and time dimensions. Because W(..)[θ] is continuously differentiable (because of complementary connectivity), therefore by the implicit function theorem of differential calculus (Baldani et al., 2005) we can write W(..)[θ] in a simple applicable form. Besides, the property of continuous differentiability of W(.) and its multiple transforms implies existence of non-singular Jacobian matrix (Hogg & Craig, 1965). Such a simple derived form of the wellbeing function for empirical application is, θ = F(x(θ), t(θ))

(6.4)

This is the quantitative form of the wellbeing function. Because by the methodology of unity of knowledge based on the monotheistic ontological law to which ‘θ’ belongs, therefore, expression (6.4) measures in applied sense the degree to which complementarities exist or can be attained by simulation between the variables ‘x(θ)’ signifying the good things of life. Such good things of life are the life-fulfillment sustainable ones in the moral, ethical, and basic needs of life.5 The degrees of complementarities signifying degrees of unity of knowledge between the variables are estimated and simulated in terms of the coefficients of the circular causation relations between the variables (Choudhury, 2016). Such a system of organic relations was referred to by Myrdal (Toner, 1999). Expressions (6.3) and (6.4) have procedural resemblance with Sen’s wellbeing configuration in terms of the complementarities between commodity bundles with capabilities and functioning. To show this fact, we write x(θ) in terms of its monotonic positive transformation by inducing C and F to the commodity bundles as functional transforms, i.e. x(θ) ⇔ (C•F)(x(θ)). Such a transformation is consistent with the sustainable continuously differentiable properties of interactive, integrative, and evolutionary (IIE) learning processes of history and their complementarities across simulacra of possibilities across life-fulfillment development regimes. The difference between the two concepts of the wellbeing criterion is in the epistemic origin of ‘θ’-values. In Sen’s case this value belongs purely to human-centered origin of rationalism. In the case of the ontological law of monotheistic organic unity of knowledge, wellbeing is morally centered into the premise of Tawhidi unity of knowledge. 5 Ghazali

referred to such life-fulfillment possibilities as (trans. Karim, n.d.). Shatibi referred to them in terms of essentials (dururiyath), comforts (hajiyath), and refinements (tahsaniyath) (Ashur, 2013). In recent times, Rawls referred to them as primaries.

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This difference yields a vast degree of distinctive consequences in economic and social theories. See Choudhury (2011b) for details. Yet similar to Sen’s CF-theory, pervasive complementarities or reconstruction of existing marginalism between x(θ) ⇔ (C•F)(x(θ)) conveying varying degrees of possible complementarities can both be answered by expressions (6.3) and (6.4). For realizing such regimes of development complementarities the primal ontological law of monotheistic unity of knowledge has substantive academic directions to offer. Examples here are of the primacy of social justice as balance between the cognitive and material accessibility of distribution and ownership by all in the Islamic meaning of wellbeing criterion. Sen’s CF-theory does not have any such prescription to offer that can be upheld as the moral and ethical origin of development regime. In Sen’s CF-theory morality and ethics are consequential, not endogenously driven by intervariable embedding. Figure 6.1 of the monotheistic primal ontological law of unity of knowledge as the universal and generalized wellbeing theory of and its particulars in the worldsystem is now given below. This model is called the Tawhidi String Relations (TSR) of the universal and unique objective model of unity of knowledge in everything as declared by the Qur’an as the Primal Ontological Law of the multiverse. We note from Fig. 6.1 the various building blocks of the monotheistic ontological origin of unity of knowledge as indicated numerically in 0–5. The important point to understand is the inter-causal feedback between the methodological stages (0–1) as primal ontology and epistemology, respectively. These primal elements form the basis of the methodological nature of the cognitive and experiential world-system under unity of knowledge. The result of such a methodological impact is the description of the generality and particulars of the world-system under study (ethical, economic, and social issues). This stage is denoted by ‘2 . Hence stage 2 leading into stage 4 marks the functional ontology as description of the objectified goal of the wellbeing criterion. The episteme of unity of knowledge is thus methodologically integrated with the mind and matter universe in knowledge, space, and time dimensions. The recalling of the primal ontology repeats the processes along evolutionary learning History over time. At the end thereby, the primal ontology (Tawhid as the monotheistic law), epistemology (derivation of knowledge), and phenomenology (abstract and measured wellbeing in terms of degrees of intrinsic and constructed consciousness ‘θ’) are completed. Sustained continuity of knowledge-induced events proceeds on by evolutionary learning over time (shown by encircling of the historistic trajectory).

Contrasting Tawhidi Epistemic Methodological Worldview to Neoclassical ‘Islamic’ Economics We now continue on to contrast the so-called neoclassical ‘Islamic’-economic ideas and applications with special reference to the wellbeing criterion. Mahomedy (2017) has incisively critiqued that ‘Islamic’ economics and its off shoots have not arisen

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from any epistemological grounds. As a result, no scientific methodological worldview arising from the ontological origin has coloured this undeveloped field. ‘Islamic’ economics has remained an imitation of the mainstream economic ideas. In reference to Fig. 6.1, the stages 0–1, and consequently the entire epistemic influence in the definition and construction of the stages 1–4, and thereby beyond into evolutionary continuity have not established the methodological worldview, as of the ontological law of Tawhid (Choudhury & Rahim, 2016). Instead of originating from the most foundational origin of the Tawhidi ontological law, ‘Islamic’ economics relies on the human-concocted juristic interpretations (fiqh and fatawa) derived in a dissociate way of understanding the shari’ah as law (Hallaq, 2990). ‘Islamic’ economists refer to such reliance on the shari’ah rules as ‘shari’ah- compliance’. They also invoke the traditional meanings of the purpose and objective of the shari’ah, referred to as maqasid as-shari’ah, not realizing that in all these terminologies true ontological law of Islam is Tawhid, not maqasid as-shari’ah. In fact, there are methodological errors of economic valuation in all aspects of the shari’ah financial contracts. They contradict the episteme of unity of knowledge of the Tawhidi worldview.6 Therefore, ‘Islamic’ economics has not been able to give a precise meaning to the concept of wellbeing conveying the episteme of unity of monotheistic knowledge in the methodological sense of organic complementarities. The terminology of wellbeing has been confused with welfare. Consequently, the elements of consciousness and policy-theoretic implications of organic unity of knowledge conveyed by pervasive complementarities between the good things of life could not be understood. The utilitarian perspective of independently distributed utility functions of marginalist commodities remained entrenched in ‘Islamic’ economic thought. Contrarily, the Tawhidi epistemic approach subjects all issues of rule-formation in the context of the wellbeing criterion to evolutionary and discursive renewal by continued referral fundamentally to the Qur’an and the sunnah (stage 0 in Fig. 6.1) in respect of the epistemic unity of knowledge. Such discursive evaluations are shown by inter-causality between choices of the complementary kinds of life-fulfillment possibilities.

Empirical Example of Quantitative Estimation of the Wellbeing Criterion A doctoral thesis by Pratiwi (2015) exemplifies how the wellbeing function can be quantified in reference to its construction according to the Tawhidi Primal Ontological reference with ensuing inferences. Pratiwi explains as follows: In a system view of socioeconomic approach to rural and urban development by Islamic banks, the wellbeing criterion ought to be focused. The wellbeing criterion, W(θ), thus 6 Problems

of the Shari’ah-compliance idea and maqasid as-Shari’ah center around the issue as to how debt is terminally retired in the mostly debt-ridden ‘Islamic’ financial instruments. There is no resolution to this question.

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becomes the main goal of the Tawhidi methodological approach. According to the TSR methodology in unity of knowledge, the wellbeing objective of Islamic banks is derived from meso-economic perspectives. Meso-economics is a theory of the mix of macroeconomic and microeconomic theories. Thereby, the conceptual wellbeing function W(θ) is evaluated as follows: Evaluate W(θ) = f(micro − variables(x), macro − variable(y), t)[θ],

(6.5)

Subject to (i,j) circular causation relations,   xi = fi xj , y, θ, t [θ] xi = fi (x, yi , θ, t)[θ] θ = F(x, y, t)[θ]. ‘θ’ expressed as the F(..)-function denotes the quantitative ‘similar’ function of the wellbeing function W(.) and is derived as an implicit function of ‘θ’. The empirical form of the wellbeing function is a goal for attaining by Islamic banks in rural and urban development by means of the Islamic financial instruments, and in the light of the Tawhidi String Relation (TSR) precept of unity of knowledge, takes the following form:

θ-estimation Overall, it was shown for Indonesian Islamic banks that all variables significantly impact long-run θ-functional in ways that are critical of interpretation. θ = 3.132 + 52.200 ∗ GDPg − 3.299 ∗ POBO − 1.476 ∗ ROA − 4.328 ∗ MMUMKM [23.8273] [−53.8711a] [−29.2288] [−14.0493]   2 R = 0.886, F − Stat = 17.576

(6.6)

Legend The natural logarithmic variables are defined: θ is a monotonic transformation of the conceptual form of the Social Wellbeing Function, W(.) in reference to TSR methodology; GDPg denotes percentage rate of change of the real GDP; POBO = 1/OER, denotes inverse of Operating Expense Ratio (OER). OER is the percentage value of the operating expense value relative to gross operating income

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6 The Meso-Economics of the Wellbeing Criterion

value. Hence, 1/OER is the income value generated from unit amount of operating expense. ROA denotes Return on Asset as percentage value of profits on asset value. This indicator is another way of measuring business health. MMUMKM denotes percentage of Mudharabah (profitsharing) and Musharakah (equity participation) as Islamic financing instruments in financing microenterprises, small and medium size enterprises. Inter-variable circular causation equations were also estimated and inferences were derived. The estimated Eq. (6.6) points out that Islamic bank performance in terms of each of the variables shown for the rural sector is negative. In terms of the urban sector the coefficient is positive relating wellbeing to real GDP growth rate. Besides, the efficiency category variables (POBO, ROA) are negatively related to the wellbeing criterion. In terms of the wellbeing criterion of rural sector, there is a negative relationship of the rural oriented variables for microenterprise, small scale and medium scale development financing by the Islamic instruments of mudarabah and musharakah. The total quantitative form of the wellbeing function shows that Islamic banks are gaining their economies of scale (increasing returns to scale) by focusing development in the urban sector (shareholders model). This pattern of Islamic resource allocation in socio-economic development between the urban and rural sectors implies the deepening effect of the neoclassical model of financing and development, which is contrary to the model of pervasive complementarities (unity of knowledge) in the light of TSR.

Computing Socio-Economic and Islamic Financing Related θ-values Over Time The θ-values are computed for estimation purposes in two steps relating to the statistical data: (1) A ranking of each of the variables is done by prorating θ-values on the assignment of θ = 10 for the best statistical variables choice. The best value is judged by the most ethical/moral choice of the values of the variables. The choice is done by each column of the socio-economic variables. (2) The prorated θ-values are next averaged across columns. In this way the table comprising all the variables and θ-values is set up for data used in estimating the θ-functional and the circular causation equations (not shown) (Table 6.1).

Computing Socio-Economic and Islamic Financing Related …

133

Table 6.1 Statistical data and averaged θ-values, examining the performance of Islamic banks in Indonesia by their rural and urban sector operations on wellbeing, 2005–2014 Time

GDP growth

ROA

1/BOPO

MMUMKM

θ

Mar-05

0.020281648

2.20649

1.147219

0.860972449

6.51

Jun-05

0.022290038

1.49047

1.196054

0.816939722

5.33

Sep-05

0.028607637

1.85724

1.184168

0.722502103

4.95

Dec-05

1.68309

1.137072

0.748190814

4.02

Mar-06

0.020481287

1.74131

1.089095

0.732029703

5.04

Jun-06

0.020405351

1.65616

1.11299

0.74961741

5.09

Sep-06 Dec-06

– 0.020315753

0.037730139 – 0.018535134

1.67299

0.981905

0.755552035

3.59

1.80431

0.893997

0.773575532

3.49

1.113309

0.759371324

6.36 5.66

Mar-07

0.02046895

2.53146

Jun-07

0.026867703

2.33461

1.156381

0.727229838

Sep-07

0.037901516

2.14231

1.203621

0.719368963

4.81

2.06945

1.212901

0.708486629

4.63

Dec-07

– 0.026830962

Mar-08

0.024095968

2.58502

1.46416

0.694449954

7.07

Jun-08

0.027682659

2.31967

1.446972

0.760869674

6.72

Sep-08

0.037434953

2.21455

1.429336

0.745890851

5.82

Dec-08

1.41687

1.304585

0.72242745

4.09

Mar-09

0.016682592

2.44545

0.944913

0.699556601

5.64

Jun-09

0.02390142

2.16547

1.082132

0.705297828

5.27

Sep-09 Dec-09

– 0.035736789

0.038764676 – 0.023427766

1.37588

0.948254

0.7124617

2.79

1.48075

0.984987

0.729358372

3.14

Mar-10

0.020427943

2.12535

1.089798

0.755012226

5.70

Jun-10

0.026853396

1.65561

1.087598

0.76961125

4.68

Sep-10

0.033995763

1.76813

1.038197

0.781943873

4.27

Dec-10

1.66864

1.154024

0.779331554

4.20

Mar-11

0.016916349

1.97020

1.454321

0.786636094

7.07

Jun-11

0.028165496

1.83985

1.477755

0.786156577

6.24

0.033180865

1.79663

1.467477

0.775623469

5.77

1.79007

1.455171

0.772133744

5.35

1.600891

0.757858041

7.30 6.86

Sep-11 Dec-11

– 0.014200406

– 0.01470251

Mar-12

0.015846008

1.82592

Jun-12

0.028302332

2.04811

1.640729

0.74196632

Sep-12

0.031907024

2.06743

1.606193

0.725016284

6.46

2.13539

1.576906

0.70260978

5.91

Dec-12

– 0.014896846

Mar-13

0.013931355

2.38559

1.353964

0.702466528

7.12

Jun-13

0.025630537

2.09924

1.361555

0.706878763

6.01

Sep-13

0.030722415

2.04000

1.407148

0.693658968

5.69 (continued)

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6 The Meso-Economics of the Wellbeing Criterion

Table 6.1 (continued) Time

GDP growth

ROA

1/BOPO

MMUMKM

θ

Dec-13

– 0.014307157

2.00000

1.396939

0.679965238

5.01

Mar-14

0.009160485

1.16000

1.302467

0.681962539

5.44

Jun-14

0.02475797

1.12000

1.476074

0.382820952

3.55

Sep-14

0.030051487

0.97000

1.492889

0.349097023

2.89

0.80000

1.509561

0.330347829

2.06

Dec-14

– 0.014047347

Source Indonesian statistics

Conclusion This chapter has broken some substantive grounds for further analytical work in the new and budding field of heterodox economics that defies the neoclassical microeconomic and macroeconomic theories. The heterodox resurgence is to be found in a new socio-scientific way of understanding the generality and particulars of world-system in view of a methodological shift into the Islamic ontology of unity of knowledge (Choudhury, 2017). Thereby, by originating the socio-scientific studies from the meta-scientific moral, ethical, and social foundations of the essential requirements of the new academe, this chapter has opened up a revolutionary methodological investigation. The consilience of religion and science is a great breakthrough in the revolutionary new comprehension of true reality. This chapter has commenced to show that an integrated way of understanding the analytical worldview is to incorporate God (hence the Ontology of Unity of monotheistic law) with the substantive details of the whole gamut of socio-scientific inquiry. On this ground (Wilson, 1998 op cit, p. 264) writes: “Looked at in proper perspective, God subsumes science, science does not subsume God. … Scientific research is not designed to explore all of the wondrous varieties of human experience. The idea of God in contrast, has the capacity to explain everything, not just measurable phenomena, but phenomena personally felt and sublimely sensed, including revelation that can be communicated solely through spiritual channels.” By opening up the vista of meta-scientific inquiry, this chapter has shown by the derivation of complementarity dynamics of the social sciences and physical sciences that, the concept wellbeing contrary to a misled notion of welfare of neoclassical welfare economics and its macroeconomic formalism becomes the singular profound objective criterion. Science in its physicalist form and the social sciences in their nonphysicalist forms are shown thereby not to be independent of the moral, ethical, and social elements of the wellbeing criterion. With these characterizations arose ways of attaining and sustaining wellbeing as the objective goal of organizing commodities with capabilities and functioning. In this respect our critique has fanned out into various comparative and contrasting directions of the literature review. A most important one of these is the study of the immanent Islamic monotheistic worldview that opens the multiverse analytical investigation within the framework of unity of knowledge that emanates from the monotheistic methodological worldview (Tawhid

Conclusion

135

in Islam) and applies it to the generality and particulars of socio-scientific details. By it both the contrasting theories and its own theory of multidimensional unity of being and becoming can be explained and evaluated. This gives rise to the concept of the universal and unique theory of ‘everything’ (Barrow, 1991). Finally, the conceptual and the empirical work based on the true Islamic Ontological Law of monotheistic unity of knowledge as methodological origination of thought have shown the prevailing approach not to legitimate all Islamic instruments as they are interpreted under the shari’ah. In applied reality these segregated rules do not yield congenial development financing results with wellbeing effects. Likewise, the ethical and social implications of such segregated treatment of various shari’ah financing instruments, institutions, and rules do not provide acceptable socially inclusive and holistic results. These results otherwise are to be found in the domain of the true Islamic monotheistic ontological law of unity of knowledge, called Tawhid. The appropriate ground of analytical investigation is the meso-theory of integrating microeconomics of macroeconomics (Ng, 1986; Dopfer and Potts, 2008). This theory is formulated by the interactive, integrative, and evolutionary method of aggregation of underlying dynamic preferences. Such preferences are primarily formed and driven by the precept of unity of knowledge as the monotheistic methodological groundwork. This contrary aspect of the use of shari’ah has been incisively pointed out by Rahman (see Hallaq, op cit, p. 527): “Rahman takes strong exception to traditional legal theory and its authors, blaming them for a fragmented view of the relevant texts. Both the legal theorists and the exegetes treated the Qur’an and the Sunna atomistically, approaching verses and individual hadiths as independent units of analysis, The lack of an integrated view of the sources was thus responsible for the absence of a worldview that is cohesive and meaningful for life as a whole.” This chapter has upheld this view in its Tawhidi methodological development of the Wellbeing Criterion in reference to the universality and uniqueness of the episteme of unity of knowledge.

Appendix: The IIE-Feature of Wellbeing Criterion as Extension of Roger Penrose’s Complexly Inter-Connected Triangle (Octagon) by the Methodology of Organic Unity of Knowledge (Tawhid) across ‘Everything’ Here is Roger Penrose’s (Oxford University Theoretical Physics & Mathematics) triangle of interconnected relations in explaining universal entirety—‘everything’ in diverse multiverses. Yet, the continuity of linkages in Penrose Triangle (Octagon) does not make it truly an “object of impossibility in its purest form” in respect of our multiverse wellbeing evaluation problem. This latter form of simplification of Penrose’s Triangle (Octagon) is our simplified interpretation of the immensely complex entanglement of organic interrelations that map ‘everything’, large, middlesized, and small into simplified enumerations.

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6 The Meso-Economics of the Wellbeing Criterion

Fig. A6.1 Extending Penrose’s triangle (octagon) by the formal methodology of unity of knowledge of compounded evaluation of the wellbeing objective criteria

In this context of the fullest systemic organic interrelations our present work has explained such organic interrelations in terms of evaluation of wellbeing as the most singular and profound objective criterion of goodness regarding evaluation of ‘everything’. Thereby, all issues and problems are cast in terms of the circular causation organic relations between the IIE-learning multidisciplinary variates concerning diverse parts of the evolutionary multiverse problems and issues. The conversion of the Penrose inter-causal complexity is profoundly simplified in our study by the evaluation methodology embodying the wellbeing function with expanding plethora of multivariates as complexity increases. Penrose’s triangular interconnectivity explains the inter-multivariate circular causation relations. The evolutionary learning nature of the ever-expanding IIE-learning sustained by organic circulatory causation represents the composite order of Penrose’s Triangle (Octagon) by means of the compounded wellbeing indexes of diverse problems and issues of multiverses. The resulting problem of systemic resolution concerning IIE-learning across ‘everything’ provides an immense degree of simplified resolution of complexity of Penrose’s inexplicable Triangle (Octagon). Such a simplification emanates from the primal ontology of unity of knowledge and is explained by embedding of circular causation endogenous multivariate organic relations in the formalism of Tawhidi String Relations (explained earlier). The inherent methodology establishes the corresponding resolution of Penrose’s inexplicable complex Triangle by the methods of mathematics and statistics formalized in the framework of the configured universe in the multiverse substantiation with continua of system-wise IIE-learning without any expansionary end. There is one more feature of the wellbeing criterion with its multivariate intercausality that is limiting in Penrose Triangle. This is the absence of inter-causal link-

Appendix: The IIE-Feature of Wellbeing Criterion as Extension …

137

ages between the nodes of the sides of Penrose Triangle. Yet this feature of most extensive and ever-evolutionary learning by multivariate inter-causality by their endogenous inter-relations remains the permanent nature of the wellbeing objective criterion. Consequently, the resulting complexity and non-linearity though relenting to simplification of resolution in the wellbeing criterion of the vastest extant of complementary inter-connectivity becomes an IIE-sphere. This is an extended reformation of Penrose Octagon (Fig. A6.1).

References Ahmad, K. (2017, April 17). Islamic banking’s challenges and goals. New Straits Times. Malaysia: Kuala Lumpur. Aristotle, trans. Welldon, J. E. C. (1987).The nicomachean ethics. Buffalo, NY: Prometheus Books. Arrow, K. J. (1951). Social choice and individual values. New York, NY: John Wiley & Sons. Al-Azm, S. (2014). Islam and secular humanism. In Is Islam Secularizable?, Chap. 1, and, “The Arab Spring: What Exactly at this Time?” Chap 12. Berlin: Gerlach Press. Ashur, M. T. I. (2013). Treatise on Maqasid as-Shari’ah. U.S.A: International Institute of Islamic Thought, Herndon, VA. Barrow, J. D. (1991). Theories of everything, the quest for ultimate explanation. Oxford, England: Oxford University Press. Bhaskar, R. (2002). Reflections on meta-reality, transcendence, emancipation and everyday life, p. 146. New Delhi: Sage Foundation. Binder, M. (2010). Elements of an evolutionary theory of welfare: Assessing welfare when preferences change. London, England: Routledge. Chapra, M. U. (1985). Towards a just monetary system. Leicester, England: The Islamic Foundation. Choudhury, M. A. (2011a). The future models of Arab political economy. World Futures, 67(6), 437–448. Choudhury, M. A. (2011b). Islamic economics and finance, as epistemological inquiry. Bingley, UK: Emerald Publications. Choudhury, M. A. (2016). Heterodox Islamic economics, the emergence of an ethico-economic theory. London, England: Routledge. Choudhury, M. A. (2017). Absolute reality in the Qur’an, pp. 81–82. New York, NY: New Palgrave. Choudhury, M. A., & Rahim, H. A. (2016). An epistemic definition of Islamic economics. ACRN Oxford Journal of Finance and Risk Perspectives, 5(2), 106–120. Dopfer, K., & Potts, J. (2008). The general theory of economic evolution. New York: Routledge, London. Einstein, A. (1954). Relativity, Chapters XXVI, XXVII. London, England: Methuen. Gel’fand, I. M. (1961). Lectures on linear algebra. New York, NY: Interscience Publishers, Inc. Gordon, R. A. (1967). Goal of full-employment. New York, NY: Wiley & Sons. Hallaq, W. (2009). Shari’a: Theory, practice. Transformations: Cambridge University Press, Cambridge, England. Harsanyi, J. C. (1955). Cardinal welfare, individualistic ethics, and interpersonal comparisons of utility. Journal of Political Economy, 63. Hawking, S. W., & Mlodinow, L. (2010). Alternative histories. In his The grand design, pp. 80, 82. London, England: Transworld Publishers. Hogg, R. V., & Craig, A. T. (1965). Introduction to mathematical statistics. New York, NY: Macmillan Co. Baldani, J., Bradfield, J., & Turner, R. W. (2005). Mathematical economics, 129–131. Canada: Thomson.

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Clark, D. (2005). Sen’s capability approach and the many spaces of human well-being. Journal of Development Studies, 41(8), 1339–1368. Mendelson, M. (2004). Aboriginal people in Canada’s labor market: Work and employment today and tomorrow. Ottawa, Ont: The Caledon Institute of Social Policy. Ng, Yew-Kwang. (1986). Mesoeconomics: A Micro–Macro Analysis. New York: St. Martin’s Press. Ghazzali, A. H. (Imam) trans. by Karim, M.F. n.d., IhyaUlum-Id-Din in 5 Vols., Sh. Muhammad Ashraf, Lahore, Pakistan. See Vol. 4 explaining the various stages of attaining belief on tawhid. Kahneman, D. (2000). Experienced utility and objective happiness: A moment-based approach. In D. Khaneman & A. Teversky (Eds.), Choices, Values, and Frames, Chapter 37, Cambridge, England: Cambridge University Press. Khaneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263–291. Kaku, M. (2015). Future: Mind beyond matter. his The Future of the Mind (pp. 266–283). New York: Anchor Books. Kuhn, T. S. (1970). The structure of scientific revolution. Chicago: University of Chicago Press. Mahomedy, A. C. (2013). Islamic economics: Still in search of an identity. International Journal of Social Economics, 46(6), 556–578. Mankiw, G. (2003). Macroeconomics. New York, NY: Worth Publishers. Minford, P., & Peel, D. (1983). Rational expectations and the new macroeconomics, pp. 15–21. Oxford, England: Martin Robertson. Myrdal, G. (1957). An unexplained general traits of social reality. In his, Rich lands and poor, the road to world prosperity. New York, NY: Harper & Row. Naqvi, S. H. (2003). Perspectives on morality and human well-being: A contribution to Islamic economics. Markfield, Leiceser, UK: Islamic Foundations. Nasr, S. H. (1987). Science education, the Islamic perspective. Muslim Education Quarterly, (5:1). Nelson, R. R., & Winter, S. G. (1982). An evolutionary theory of economic change. Cambridge, MA: The Belknap Press of the HarvardUniversity Press. Pratiwi, A. (2015). Islamic banking contribution in sustainability of socioeconomic development: An epistemological approach. Faculty of Economics: Trisakti University, Jakarta, Indonesia. (unpublished). Qadri, C. A. (1990). Philosophy and science in the Islamic world. London, England: Routledge. Quinton, A. (1989). Utilitarian ethics. La Salle, IL: Open Court. Rawls, J. (1971). A theory of justice. Cambridge, Massachusetts: Harvard University Press. Rodinson, M., trans. B. Pearce. (1973). Islam and capitalism. New York : Pantheon Book. Romer, P. M. (1986). Increasing returns and long-run growth. Journal of Political Economy, 94, 1002–1037. Sardar, Z. (1988). Islamic futures, the shape of ideas to come. Petaling Jaya, Malaysia: Pelanduk Publications. Sardar, Z. (1984). Islamisation of knowledge or the westernisation of Islam? Inquiry, 1, 7. Sen, A. (2010). Commodities and capabilities. Oxford, England: Oxford University Press. Sen, A. (2002). Rationality and social choice. his, Rationality and Freedom (pp. 261–291). Cambridge, MA: The Belknap Press of Harvard University Press. Sen, A. (1989). Development as capability expansion. Journal of Development Planning, 19, 41–58. Sen, A. (1977). Rational fools: A critique of the behavioural foundations of economic theory. Philosophy and Public Affairs, 6. Sen, A. (1970). The impossibility of a Paretian liberal. Journal of Political Economy, 78. Sraffa, P. (1960). Production of commodities by means of commodities. Cambridge: Cambridge, University Press. Toner, P. (1999). Gunnar Myrdal (1898-1987): Circular and cumulative causation as the methodology of the social sciences. In Main currents in cumulative causation, the dynamics of growth and development, Chapter 5. Houndmills, Hampshire: Macmillan Press Ltd. Wilson, E. O. (1998). Consilience: The unity of knowledge. New York, NY: Vantage Press. Wolff, R. P. (1977). A reconstruction of a critique of a theory of justice: Understanding rawls. Princeton, NJ: Princeton University Press.

Chapter 7

Imaging the Imaginary Events in Evolutionary Learning Trajectories of Wellbeing

Abstract Wellbeing can be a subjective functional criterion caused by imagined hurt and benefit in an otherwise pure and real exchange economy, despite with dynamic preferences aggregating the endogenous inter-variable causality of microeconomic behavioural nature to aggregate preference system. I refrain from calling such an aggregation as macroeconomic phenomenon, or even as microeconomic foundation of macroeconomics because of the persistent problem of aggregation and the absence of behavioural representation in macroeconomic theory. Thus a mesoeconomics as meso-science approach to investigate the aggregative nature and logic of dynamic preferences is pertinent to the underlying analytical study.

Objective The objective of this chapter is to draw an impossible wedge for imaginary preferences, variables, and circular causation relations between real and such imaginary calculus of benefits and hurt, pleasure and pain. The idea of ‘imaginary’√is endowed in wellbeing functional formalism by the appearance of the number i = −1 and all its related transformations, such as (a + b · i) and (1 + i), with a and b being arbitrary non-zero constants. Such mathematical transformations in the wellbeing function make all events along the evolutionary learning trajectories to be real, configured, continuously differentiable and interpretable for analytical, predictive, and inferential purposes. The phenomenological implication of such real-world inference is that economics and science in particular do not deal with imaginary events. In fact, imaginary events do not exist as they are automatically transformed by their conjugates. That is if (1 + i) is imagined, then its conjugate (1 − i) transform the imaginary by the conjugate function (1 + i) × (1 − i) = 2 and so on in multiple rounds of conjugation. To investigate this real-world implication is indispensable. Without observing this fact and concluding that there are only real events in life, endogenous circular causation relations cannot be pervasive. All beings and their inter-relations are indispensably real-world phenomena. In the more philosophical meaning, Kantian pure reason of deductive a priori reasoning © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2020 M. A. Choudhury, Islamic Economics as Mesoscience, https://doi.org/10.1007/978-981-15-6054-5_7

139

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7 Imaging the Imaginary Events in Evolutionary Learning Trajectories of Wellbeing

I1 R1 I2HH:( ,S) { } { ,X( ),t( )} Eval. W( ,X( ),t( )), conceptual simulaon connuity Subject to circular causaon by intrafi(R( )) = W(X( ),t( )), empirical and interI3 systemic R2 evoluonary learning. I4 Fig. 7.1 Imaging the imaginary into the only nature of the world as the phenomenology of realworld

cannot be left dichotomous from the inductive a posteriori reasoning. The two realms of reasoning are inter-causally relational. This is equivalent to say that the problem of heteronomy as separation between a priori and a posteriori and only forced combination between these is annulled and full explanatory power is embodied in every event under inquiry and integration in the only world that manifests as the symbiotic web of a priori and a posteriori embedded together. In this regard Whitehead1 defines concrescence as a process of social becoming of the universe in which many things or entities, in an extended sense of relations, form an organic unity. Such an organic unity of being and becoming explains the dynamics of the inner space of relations. This is spanned by the permanent presence of the unitary law of monotheism. Its realism then manifests in the world of concrescent reality of being and becoming. In the context of the Tawhidi methodological worldview, there is only the continuous novelty of learning and unification based on the Tawhidi Law of monotheistic oneness. The Qur’an (Chapter 112) refers to monotheism as Tawhid in terms of the totality of belief, practices, universal design, and symbiotic manifestation. This pervasive extension of Tawhidi phenomenology is based on the need for using Tawhid as the primal ontological Law in respect of its explanatory methodological worldview and configured applications for socio-scientific details of ‘everything’. Figure 7.1 explains that every imaginary conjugates, I1 , I2 , I3 , I4 etc. combines to produce real-world events. Thereby, the conjugate (I1 , I2 ) combine to produce real event R1 and its transforms denoted by f1 (R1 ).2 Likewise (I3 , I4 ) conjugate to produce R2 and f2 (R2 ), etc. It is then possible to endogenously interrelate (R1 , R2 , …), and thereby, (f1 (R1 ), f2 (R2 , …) in reference to the primal ontological law of oneness as inter-causality causing the knowledge-induced phenomenology of wellbeing, W(θ, X(θ), t(θ)), subject to the entire set of circular causation relations according to the 1 Whitehead

(1978).

2 Such compounded transforms of complex numbers is stated by De Moivres’s Theorem of complex

numbers: Let z = r(cos(α) + isin(α)) be a complex number and n any integer. Then, zn = rn (cos(nα) + isin(nα)). See Schneider, C. (2011). “De Moivre’s Theorem”.Master’s thesis, Department of mathematics and Statistics, Portland State University, U.S.A.

Objective

141

variables {θ, X(θ), t(θ)} of the wellbeing function in reference to the primal ontology and its methodological details—the abstracto-empirical. In this paper these wellbeing functional transformations will be explained in reference to the generalized equilibrium system that applies to the entire socio-scientific domain of inquiry.

Analytical Properties Along the Trajectory of History HH The following assumptions are made in our analysis of knowledge-induced evolutionary learning processes of unity of relations between the variables of the wellbeing function: 1. Monotonic relationships exist between {θ, X(θ} over time intra-system and intersystem in terms of the endogenously related variables via circular causation relations.Such relationships are true both in the positive and the negative sense. That is with continuously differentiable property of variables and functions fully comprising the wellbeing system, dX(θ)/dθ > 0 for wellbeing choices (Arabic maslaha). dX’(θ’)/dθ’ > 0 for negative wellbeing choices (Arabic mafasid indicated by asterisks). dX(θ)/dθ’ < 0, meaning maslaha choices negated in the face of false preferences, and vice versa. Maslaha choices and mafasid choices can appear together in the wellbeing function. Their presence can be expressed as a diminishing ratio as ‘θ’ increases. For example, interest (‘i’ riba) and rate of return in legitimate trade (r) can appear together in the wellbeing function as the ratio, (i/r)[θ] with (d/dθ)[(i/r)[θ]) < 0; that is as evolutionary learning increases consciousness of maslaha choices. 2. The monotonicity property of evolutionary learning of (1) implies non-existence of optimal points and steady-state equilibrium. Only evolutionary convergences exist at points of decision-making along the historiographical trajectory HH. 3. The wellbeing function is expandable as a polynomial in the neighbourhood of evolutionary equilibrium points such as of a point of decision-making by interaction, integration, and evolutionary learning; and thus across the entire of History HH.3 4. Assumption (2) implies that over discrete sequences of evolutionary learning processes in time there are decision-making points that invoke the evaluation of the wellbeing model with inter-causal relations between the variables and simulative decisions are made along HH. A special case of the emergent polynomial in {θ, X(θ)} over time-periods of decision-making processes with evolutionary learning in unity of knowledge, is the inter-generational asset-valuation model.4 These properties are shared by the following specific form of the wellbeing functions. They are transformed out of imaginary functional conjugates into a real-valued 3 Such

polynomials are determined by the multivariate Taylor’s Series in real, continuously differentiable variables and their functions. 4 Choudhury, Hossain, and Shahadat (2019).

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7 Imaging the Imaginary Events in Evolutionary Learning Trajectories of Wellbeing

function expressing real events of the resulting wellbeing criterion. An example of these kinds of functional transformations is that of two events. One gives a polynomial solution of income multiplier with marginal propensity to consume having a value greater than 1. This causes an explosive in come multiplier effect of the change of income, and is an unreal solution of the multiplier polynomial. People in this situation live in the imaginary land of infinite bliss of wellbeing by income and consumption. Such a heavenly bliss must be transformed into real-world effects by its complex conjugates. Such is the qur’anic meaning of the experience that heavenly dwellers would compare the heavenly real attributes with their similitudes of earthly life: “…Every time they are fed with fruits therefrom, they say: ‘Why, this is what we were fed before,’ for they are given things in similitude…” (Qur’an, 2:25). The wellbeing function of the imaginary world in income (Y) and consumption (C) denoted √ by. √ X(i = (−1) · θ = (Y, C)[ (−1) · θ]. There is no relevance of ‘t’ in such a world of Nirvana. The imaginary wellbeing function has the expression,    W i = (−1) · θ = exp(i · θ)

(7.1)

Likewise the same description of imaginary bliss would apply to the complex form, W((1 + i = 1 +

 (−1) · θ)) = exp((1 + i) · θ)

(7.2)

The conjugate functional transform to replace the imaginary wellbeing function into the real experience of wellbeing of the qur’anic Heavenly Bliss we proceed as follows by referring to expression (7.2). W(θ)) = exp((1 + i) · θ) ∗ exp((1 − i) · θ) = exp(2θ), t is irrelevant

(7.3)

The further transformation of expression (7.3) by X(θ) = (Y, C)[θ] is this: W(X(θ · t)) = exp(2 · (a · Y + b · C))[θ, t]

(7.4)

where ‘a’ and ‘b’ are positive coefficients. All coefficients and variables are commonly induced by the principle of unity of knowledge ‘θ’ ∈ (, S) as explained in Table 1 of Preface and in other chapters.‘Time ‘t’ is now relevant to impute values pertaining to the real-world entities.

Generalized Wellbeing Function

143

Generalized Wellbeing Function n-times multiple compounding of expression (7.4) to explain multiple intra- and inter-systemic relations yields the generalized wellbeing function, W(θ, X(θ), t(θ)) =

n 

Wk (Xk (θ, t)) = exp

k=1

 n 

 (ak · Yk + bk · Ck ) [θ, t] (7.5)

k=1

More generalized transformation of the wellbeing function can be expressed in the log-linear ‘θ’-induced form of expression (7.5). Without loss of generality of the symbols we write, W(θ, X(θ ) = (Y1 , Y2 , .., Yn , C1 , C2 , . . . , Cn , t(θ ))[θ ] n  = (ak · Yk + bk · Ck + c · θ )[θ, t]

(7.6)

k=1

The system of inter-causality relations of (2n + 1) number of equations between the vectors of endogenous variables is given by, Ys (θ) = fs (Ys , Cs , θ, t)[θ]

(7.7)

Cs (θ) = hs (Ys , Cs , θ, t)[θ]

(7.8)

s, s = 1, 2, . . . , n θ = W(Y, C, t)[θ]

(7.9)

Each of these equations is preferred to be taken in the log-linear form as shown in expression (7.6). The system comprising (7.6)–(7.9) is the generalized system of computational general evolutionary equilibriums in the vector {Y, C, θ}[θ] that are firstly estimated and then the estimated coefficients are simulated to gain on unity of knowledge between the variables and improve the economy of scope of the quantitative measure of evaluated wellbeing given by Eq. (7.9). The complex form of the wellbeing evaluation system is due to the θ-induction of the coefficients. This means that, in continuous knowledge, space and time dimensions statistical analysis to improve the degree of unity of knowledge between the evaluated variables of the wellbeing function is carried out by simulation of the coefficients. Then the corresponding policy-analyses in this direction are accomplished also by simulating the coefficients and improving the inter-variable correlation. These

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simulated results based on gaining unity of knowledge in the wellbeing by evolutionary learning and thus complementarities between the evaluated variables are done by the inter-causal relations. The method of Spatial Domain Analysis is a way to quantify the continuous simulation results. Every instance used to simulate the coefficients in accordance with the principle of unity of knowledge in the wellbeing function conveys the meaning of choice of different feasible θ-values. Thereby, new vectors of evaluated variables are obtained via the circular causation relations. Later on in this chapter we provide an empirical example of the use of SDA in simulating the wellbeing function with θ-embodied variables and coefficients.

An Example of Continuous θ-induced Simulation Charity for the good cause such as of poverty alleviation and human empowerment ought to be a continuously conscious activity in citizenship. Charity through its multidimensional impact causes systemic rejuvenation of wellbeing among many and for all times. The Qur’an (2:245) declares: “Who is it that would loan Allah a goodly loan so He may multiply it for him many times over? And it is Allah who withholds and grants abundance, and to Him you will be returned.” A saying of the Prophet Muhammad (hadith) goes: (Sahih Bukhari, Chapter 24, No. 506): “Allah’s Apostle said, “When a woman gives in charity some of the foodstuff (which she has in her house) without spoiling it, she will receive the reward for what she has spent, and her husband will receive the reward because of his earning, and the storekeeper will also have a reward similar to it. The reward of one will not decrease the reward of the others.“ Indeed, the sage goes, “Charity begins at home”. In the context of our formalizing of wellbeing charity by its multidimensional development effects enters in relation to compound functions of the interrelated benefits that multiply. The meaning conveyed in respect of our wellbeing formalism is explained by Fig. 7.2. The trajectories of loci of knowledge-induced evolutionary learning events, Es = {E(θ, X(θ), t(θ))}, form compounded wrappings of the evolutionary fields of events intra- and inter-systems in knowledge, space, and time dimensions. This is like the multidimensional and ever-rewarding benefits wrapped by historiographies of knots in Hs Hs .5 The events Es , s = 1, 2, … denote evolutionary convergences as points of evolutionary learning equilibriums. The evolutionary convolutions around E’s denote intrasystemic evolutionary learning in the form of conic depiction shown in 3. There are similar depictions along all possible historiographies like H1 , H2 , etc. as shown. H1 H2 …etc. represent wrappings of the links between historiographies of events in continuous evolutionary learning trajectories as described here. Figure 7.3 is the vertical depiction of Fig. 7.2 in terms of evolutionary learning in

5 Hoste

(2005).

An Example of Continuous θ-induced Simulation

145

H1 H1

E1

E2

E3

En H2

H2

Fig. 7.2 Compounded historiographies of evolutionary learning paths

Fig. 7.3 Intra- and inter-systemic compounded wrappings of evolutionary learning in historiography

E’s H 2’

H2

H1

H1’

E’s

E1 knowledge, space, time dimensions of inter-causal relations intra-systems. The same are repeated inter-systems over time in terms of evolutionary learning processes. Now returning to our example of charity taken in its broadest meaning of moral and material productivity through wellbeing, the depictions shown in Figs. 7.2 and 7.3 explain the ever-expanding empowerment of wellbeing across historiographies of evolutionary learning trajectories. The valuation of wellbeing takes place at each of the processes by time-periodic realization of stations of decision-making. These coordinates are denoted by the evolutionary convergences of E’s. In fact these coordinates define the entire loci of historiographies, but are marked out for evaluation

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at specific points. The example in this case is of valuation of assets along the intergenerational trajectories of moral-material embedding of net wellbeing compounded together.

Evolutionary Learning Property of Wellbeing Function in Its Exponential Compounded Wrapping The generalized evolutionary learning property of the wellbeing function in its form in expression (7.4) generalized to expression (7.5) is this:  (d/dθ) exp

 n  k=1





(ak · Yk + bk · Ck ) [θ, t] = exp



n 

 (ak · Yk + bk · Ck ) [θ, t]

k=1

(7.10) >0, identically irrespective of any particular process along HH(E(θ)). In the example of charity as moral-material empowering conscious human rendering and the case of all moral-material transformations to lie in the real domains rejecting the relevance of imaginary complex fields, all wellbeing choices convey ceaseless benefits to individuals and society at large. Such a compounded inter-causal relationship between the moral and material values of the widest meaning of charity can be learned from the following saying of the Prophet Muhammad: The Prophet said, a voice was heard commanding a cloud to irrigate a man’s garden and so he did as a productive undertaking. When the man was asked what he did with the garden, he replied that he estimated the produce of his garden. Then he distributed one-third to charity (moral consciousness), kept one-third for himself and his family (the social function), and invested one-third back into the garden (the economic function). Such indivisible linkage between moral and material values in their extensiveness, no matter how small, is indeed the property of the evolutionary learning along historiographies of inter-causal organic relations between the characterising variables of the wellbeing function. The Prophet’s guidance in this regard of the permanent linkages by embedding of the moral and material values can be discovered in his saying (Al-Bukhari and Muslim): “Protect yourself from hell-fire even by giving a piece of date as charity.” The valuation of life and wellbeing through unity of knowledge in all of being and becoming is a pervasive truth of complementarities between potentialities. In the examples of asset-valuation and wellbeing based on evaluation of health program as a resource, each event point when ascribed becomes an evaluation of the wellbeing objective criterion subject to all the details of the circular causation relations. These relations interactively integrate the moral and material values in cogent sets of variables embedded in ‘θ’-parameter over intertemporal evolutionary learning processes. One way how moral and material values are integrated in the wellbeing evaluation

Evolutionary Learning Property of Wellbeing …

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of health as human resource can be by embedding psychotherapy with physiological treatment of patients. Rehabilitative procedures now become effective. Furthermore, because of the inter-causality between these conscious undertakings, any one without the other responsibilities breaks up the meaningfulness of socioeconomic valuations. Thereby, any and every model of evaluation in the truly ‘Islamic’ case must be constructed explicitly in terms of the moral and material explanatory variables for Islamic wellbeing. Without this fundamental requirement there cannot be a truly Islamic economic, social, and scientific undertaking. The independence and exogenous treatment of moral values is nonetheless an academic barrenness of existing ‘Islamic’ economics in its garb of mainstream economic imitation. Contrary to the Tawhidi methodological worldview, shari’ah as human concocted body of jurisprudence accumulated over a long period of Islamic history, and having no qur’anic equivalence to Tawhid (Qur’an 45:18;)6 has remained barren of any truly Islamic epistemic relevance. Tawhid is ontological in its unique and universal methodology. Shari’ah is not. Rather, shari’ah represents a body of juristic rules and interpretations, called fiqh. These have been formulated by sects and their leaders throughout Islamic history. Such rules range from personal beliefs to state legislation in accordance with interpreted ideological spectrum of sects (madhab). The practice of such shari’ah developments are found today as in the past in reference to sectarian interpretations (madhab) and their enactment by institutions. Examples of such enforcements by shari’ah rules are found in the case of declared legitimacy of debt-ridden ‘Islamic’ financial instruments; thereby the functions and goals of Islamic banking; and the enforcements of rules by state institutions (Malaysia, Indonesia) and institutions (Islamic Development Bank, Islamic universities). Shari’ah thereby developed under the influence of interpretations, cultural background, and transference of sectarian legal ways over space and time. Such variations in perspectives have no place in the building of a unique and universal theory of socio-scientific order, though engaging problem diversities by disciplines. Shari’ah led scientific thought in the field of so-called ‘Islamic’ economics thus succumbed to the rationalistic episteme of mainstream economic thought along with its impossibility in incorporating the moral-material unified worldview by methodological formalism. In this work we have discarded the shari’ah approach altogether, except where the meaning of shari’ah is equivalent to Tawhid as law and methodological application in reference to monotheistic unity of knowledge in the qur’anic entirety. Such entirety encompassing soul, mind, and matter in the res extensa and res cogitans of knowledge, space, and time entirety of the most comprehensive meaning of true reality is derived from many qur’anic verses, and specifically from the following one (Qur’an, 2:255; with interjected inferences in brackets): “Allah. There is no god (no other but the monotheistic law and meanings) but He, the Living, the Self-subsisting, Eternal (the most pervasive eternal law).No slumber can seize Him nor sleep (the monotheistic law exists in continuum).His are all things in the heavens and on earth 6 Qur’an

(45:18): “Then We put you, [O Muhammad], on an ordained way concerning the matter [of religion]; so follow it and do not follow the inclinations of those who do not know.”.

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(entirety of creation).Who is there can intercede in His presence except as He permits (no extraneous law and meanings)? He knows what (appears to His creatures as}; before or after or behind them (Tawhid as law explains everything). Nor shall they compass aught of His knowledge except as He wills (human evolutionary learning). His Throne does extend over the heavens and the earth, and He feels no fatigue in guarding and preserving them for He is the Most High, the Supreme (in glory) universality and uniqueness of Tawhid as law.”. Thus by interpretation of Tawhid in relation to the details of the world-system, specifically economic theory and its quantitative formulation this work invokes a theory of mesoeconomics. It conveys a substantively new formalism of the meaning of microeconomic foundation of aggregate economics (macroeconomics in its classical, neoclassical, new classical and Keynesian sense). The new formalism of the wellbeing criterion is the proper objective of the meso-economics of unity of knowledge between the moral and material domains in continued sustainability across knowledge, space, and time dimensions. The uniqueness and universality of the wellbeing objective is understood in respect of its generalized adaptation to ‘everything’ explained by the symbiotic inter-causal relations between the entities and variables. This attribute prevails even though given the interdisciplinary diversity of issues and problems, but organically integrated together intra- and inter-systems. One can then image the intricacies of a neurocybernetic world system of systems. Boulding wrote regarding the need of science to be transparent for abstraction and application, rather be opaque. Boulding7 wrote: “The crisis of science today arises because of the increasing difficulty of such profitable talk among scientists as a whole. Specialization has outrun. Trade, communication between the disciples becomes increasingly difficult, and the Republic of Learning is breaking up into isolated subcultures with only tenuous lines of communication between them - a situation which threatens intellectual civil war. The reason for this breakup in the body of knowledge is that in the course of specialization the receptors of information themselves become specialized. Hence physicists only talk to physicists, economists to economists - worse still, nuclear physicists only talk to nuclear physicists and econometricians to econometricians. One wonders sometimes if science will not grind to a stop in an assemblage of walled-in hermits, each mumbling to himself words in a private language that only he can understand.” Even so in the field of shari’ah and economics,8 shari’ah contrary to its strictly Tawhidi equivalence of meaning in the Qur’an, conveys certain abstruse meanings. They are hardly acceptable in formal logic and belief. For instance, shari’ah bereft of Tawhid as law in its methodological emptiness, cannot lead to the organic inter-causal endogenous relations between morality/ethicality and materiality. Consequently, the substantive formalism of the wellbeing function (maslaha) remains unknown in socalled ‘Islamic’ economics and finance. Instead, writers and shari’ah led institutions are groping for the formation of what is referred to as Maqasid as-Shari’ah Index9 7 Boulding

(1956) and Hoque (2017). 9 Asutay and Harningtyas (2015). 8 Choudhury

Evolutionary Learning Property of Wellbeing …

149

having exogenously assigned weights to its various selected variables that do not arise from the vastly extensive possibilities of the five limited items of maqasid as-shari’ah.10 The vastly many choices interrelate endogenously according to the precept of unity of knowledge. The coefficients of the wellbeing function are thereby also endogenously evaluated by estimation and simulation. The resulting extended systemic relational approach to inter-causality between Tawhid determined endogenous choices of felicity in the wellbeing function are endlessly extensive in the variables of goodness of choices.11 Thereby, the wellbeing objective function is evaluated subject to their enumeration of as many variables as possible within the limits of knowledge and cognition. The centrepiece of the wellbeing objective is thereby a most significant methodological contribution of our times in the meso-analytical framework of all socio-scientific inquiries.

Spatial Domain Analysis Real world entities occupy geographical space. There exist inter-causal relations between the various coordinates and systems of such geographical space. We thus treat such inter-causal relations as being relationally linked to each other.12 In the language of systems and cybernetics a technology/system organizes the spatial or locational information. This mode of data simulation in the study of linkages enables visualisation, analysis and modelling of the spatial interaction between interrelational coordinates of variables. This is the essence of pervasive endogeneity in systems of inter-causal relations. The whole underlying computer-assisted method is called Spatial Domain Analysis (SDA). It is a derived method of the Geographical Information System. It is a method borrowing from the ontological methodology of unity of knowledge expressed by organic symbiotic interrelations between variables, coordinates, and their functional relations. Thereby, the properties of interaction (I), integration (I), and evolutionary learning as evolutionary epistemology,13 and thus the abbreviation (IIE), become amenable of study by SDA-GIS in the socioeconomic development topology.14 In respect of the above explanation of SDA-GIS we find that this method carries forward the methodology of Tawhidi unity of knowledge and its underlying intercausal dynamics of evolutionary learning of IIE-processes cogently by the use of the GIS computer-assisted technique. Thus, GIS can be considered as a technology,

10 (1)

Protection of religion, (2) Protection of reason, (3) Protection of family, (4) protection of progeny, (5) Protection of property rights. 11 Qur’an (55:13): “So which of the favors of your Lord would you deny?”. 12 Hossain (2002). 13 Campbell (1988). 14 Choudhury, Zman, and Harahap (2007).

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facilitating the study of spatial cause-effect circular relations between domains and their entities, variables, and relations. In addition to the above-mentioned effectiveness of SDA in IIE-process studies of complex organic relations, GIS-SDA also provides visualisation of the result of circular causation relations and the evaluated wellbeing function in respect of the principle of unity of knowledge in IIE-processes.. Hence, the interrelated components and their dynamics of IIE-processes can be configured quantitatively in the realworld system context. In this way, GIS facilitates the study of complex systems imaged in and by the ‘computer-assisted world-system’. Such kinds of configured and quantitative results have several advantages in enabling the development of simulated solutions of complex system and cybernetic oriented problems. SDA enables the capability of GIS to generate various “what if” scenarios. Such results are derived as simulated ones in the IIE-decision making evolutionary learning processes for evaluating the effects of decision-making process on a real-time basis. Thus, it can be seen that GIS is an appropriate tool to deal with the theme of Relational Epistemology, which underlies the IIE-learning processes. In regards to the multidisciplinary study enabled by the complex dynamical approach of GIS technology we note that many transdisciplinary fields can be launched in system and cybernetic study. Examples are of complex systems existing on the space of the earth’s surface, and in other spaces including the topological spaces of other planets, the cosmological space, the space of human soul, mind and body as the captured by imaging of the imaginary into real valued functions.15 Most importantly, SDA can be applied to analyse and visualise the imaginary space of topological mathematics and statistics. Contrary to SDA, the SPSS statistical technique handles only linear forms of relationships where coefficients although statistically estimated, do not lend themselves to policy and environment perturbations in complexly interrelated situations. The coefficients of the wellbeing model with the system of inter-causal relations estimated by the SPSS method of regression equations corresponding to non-linear models cannot explain the sectoral impact of multiple policies and inter-sectoral changes. Hence, the SPSS technique is of a static nature lacking a dynamic way of showing changing scenarios on a real-time basis, taking account of policy and decision variables. Therefore, SPSS estimates alone are unable to bring out the dynamics of IIE-learning processes that explain relational epistemology. In the face of limitation of explaining the dynamics of such results of SPSS, SDA is applied to the regression coefficients to transform them into process learning ones with simulation cause by inter-sectoral policies and decision making. Thereby, SDA enables the retrieval of hidden causations that lie embedded in the statistical domain or in an imaginary space of development planning. We have used a combination of SPSS method of estimation and the SDA simulation method to explain dynamic perturbations of the coefficients that are caused by hidden factors but remain hidden because of their endogenous nature of interrelations. The following equation is one of the entire systems of circular causation 15 Longley,

Goodchild, Maguire, and Rhind (2001).

Spatial Domain Analysis

151

equations of the underlying wellbeing criterion explained to construct complementary inter-sectoral relations under the development plan of sectoral diversification and balanced development. IogQma = −7.017 + 1.359logQp + log0.306 Qg + 0.291 log Qmi − 0.328Qu t − stats( − 970) (1.148) (0.607) (2.397) ( − 0.397) −0.171 Log Qc − 0.002 Log Qfin + 0.401Log E t − stats( − 0.675) (−0.101) (0.642) Other similar circular causation between the sectors were estimated by SPSS method. Legend: (ma) manufacturing sector; (p) petroleum sector; (g) gas sector; (mi) minerals sector; (u) utility sector; ( c) construction sector; ( f) sector; E = total number of employed labor force. Q’s are the various sectoral GDPs. This paper demonstrates how statistical estimates are sensitized by endogenous factors in the spatial domain by SDA method. Such sensitivity analysis enables a graphical visualisation of the statistical space from different perspectives using spatial domain analysis. The partial elasticity coefficients data generated in a statistical space by using SPSS program has been considered to visualise the degree of complementarities gained between the sectors for the case of sectoral GDP and total employment by sectors. The matrix of the generated data in statistical space was used to visualise the inter-sectoral input–output contributions to sectoral GDP and total employment. From this kind of the input–output table we display the sectoral linkages and possibility of enhanced linkages in both 2-D and 3-D spatial domains. We use the estimates of sectoral GDP and total employment variables for the Sultanate of Oman, 1980, 1990 and 2000. Empirical details are given elsewhere.16 It can be demonstrated that the data in spatial domain is easier to visualise in an interactive and user-friendly way than in a statistical space. Furthermore, Spatial Domain Analysis (SDA) could support a system of circular causation type of decision-making processes as was explained in several earlier chapters in the context of relational epistemology. In addition, SDA’s graphical output enables us to obtain alternative estimated scenarios of partial elasticity coefficients in the inter-sectoral Cobb–Douglas form of GDP relations by taking account of policy and decision variables. By so extending the GIS technology to a problem of development planning a major contribution is attained in the field of GIS-application in the economic, social and development space.

16 Choudhury

and Hossain (2006).

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Partial Elasticity Coefficients The above-mentioned estimated equation for manufacturing sector obtained by using SPSS show the degree of interaction between manufacturing and other sectors. For example, there is a negative interaction between manufacturing and finance sector since the value of the partial elasticity coefficient in this case is negative, which is −0.002. Hence, there is an absence of linkages between the two sectors. In this type of analysis it is difficult to show how this negative interaction (marginal rate of substitution = trade-off) between the given sectors can be simulated into positive sectoral output elasticity coefficient (sectoral linkage) by inducing policy or choice variables, and therefore, bringing about sectoral integration and linkage. In addition, the mere SPSS method does not allow incorporation of various changing values that continuously affect policy and choice variables. Thereby, the evolutionary character of the sectoral change in terms of GDP and total employment remains unexplained, since the estimated coefficients are limited to only one value of policy- induced variable. Thus in all, the mere SPSS statistical method cannot bring out the dynamic nature of sectoral interaction and linkages that can illustrate the embedded Integration and Evolution by learning processes in regards to sectoral linkages.

Input–Output Matrix Format of Generated Data The equation presented above shows the interaction between manufacturing and other sectors. Similarly, other relational equations are developed to show the numerical interaction between each sector and other ones. The statistical estimates of the partial elasticity coefficients of the multivariate and multi-equations regression model are applied to the estimates of sectoral GDPs to compute the sensitivity analysis by such elasticity coefficients.17 This sub-model is a revised form of a dynamic input-output relationship between sectors. Examples of inter-sectoral GDP and total employment I-O matrixes are shown below. From the above arguments we conclude that neither log-linear form of CobbDouglas equation nor its derived matrix format of the I-O model is capable of effectively illustrating the Interactive (I) character of IIE-process model of development planning. In addition, due to the above-mentioned drawbacks in SPSS related estimation in showing dynamic scenarios under different policy induction, such statistical derivations left to themselves remain incapable of demonstrating circular causation between the sectors. Thereby, the Integration component of the IIE-process model is ignored. Because such statistical methods by themselves do not illustrate the changing i (θ) = Ai (θ) + [ j aij logxj ][θ] + bi logθ + εi . ‘i’ denotes sectors shown in the. Partial elasticity of xi to any xj is given by, ∂logxi /∂logxj = (xj /xi ) * (∂xi /∂xj ) = aij . Thus the sensitivity of the changes between the x-variables of sectoral outputs is given by, ∂xi /∂xj = aij *(xi /xj ), i , j = 1, 2, …∂xi /∂xj = aij *(xi /xj ), i , j = 1, 2, …

17 In general, take a general form of the partial elasticity coefficient in the equation, logx

Input–Output Matrix Format of Generated Data

153

inter-sectoral scenarios with policy induction, therefore the Evolutionary (E) component of the IIE-process model of development planning is also left out. At the end the inherent dynamism of the IIE-process model of development planning is difficult to perceive in the SPSS statistical approach left to it. In the following section we will show how the computer-assisted real-time simulation results enabling the conversion of negative partial elasticity coefficients into positive valued ones by endogenous impact. In addition the method of spatial representation of the SPSS statistical results in the GIS/SDA environment are presented. The SDA-generated results on visualisation of development planning perceived in the relational space of a development planner are charted. The results are shown below. The approach of combining different sets of information, as is the case with mesoeconomic treatment enables the various tasks to be performed within GIS environment such as spatial query, spatial reasoning, spatial planning, spatial analysis and spatial modelling of a real world problem like sectoral development planning as addressed in this book. The linking of the three modes (spatial, thematic and temporal) can be seen as the formation of the next generation of spatial database. This allows the analysis of the real world problem in real-time basis to be addressed in this exercise and to show the simulation of the changing scenarios based on the perturbations caused by policy variables. Figure 7.4 illustrates the interaction between Manufacturing and the other sectors. The intensity of interaction is highest in the deeply coloured region and reduces with the thinness of colour. As mentioned previously that statistical data was assigned as a value to one of the fields (‘Man’) of the Tabular database of the thematic mode and this database was integrated with the Feature Table of the spatial vector data structure

Interacon between manufacturing and other sectors Fig. 7.4 Visualisation of sensitivity of elasticity coefficient on sectoral GDP Data in 2-D Surface

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7 Imaging the Imaginary Events in Evolutionary Learning Trajectories of Wellbeing

known as Shape File. In this way, statistical data were converted into spatial domain. Figure 7.4 demonstrates this conversion in a graphical way. Such a transformation from statistical space to spatial domain enables a better visualisation of the interaction between the sectors. Thereby, the IIE-process model of relational epistemology in development planning is displayed by the use of SDA-method. The most important result here is the possibility of visually simulating the statistical results in real-time. Each of such moving simulated point in the spatial domain represents a policy-induced form and the use of appropriate endogenous factors that cause better linkages between the sectors, better integration as a component of the IIE-process model. In this way, the improving linkages move the lighter visual regions into deeper regions, meaning that there is enhancing intersection between the regions as shown. In other words, the partial elasticity coefficients that were negative in the SPSS-estimated regression equations, signifying weak or no linkage between sectors were simulated by SDA into positive valued coefficients. Such a transformation of coefficient values is the example of Evolution by means of endogenous induction and structural changes in development planning in the IIE-process model. Thus, all the three components of the IIE-process model are demonstrated in the Spatial Domain Analysis.

Visualisation of Matrix Data Conversion into 2-D and 3-D Applying the mentioned procedures, the I-O matrix derived from statistical estimation (coefficients) is converted into spatial domain. Figure below visualizes the contribution of manufacturing sector to other sectors (Fig. 7.5). It is important to note that in this type of 2-D representation although an understanding of the changing contribution (interaction) of a sector to another at an interval of a year can be perceived, it does not allow an understanding of the other two components, namely Integration and Evolution by learning in the IIE-process. This missing attribute can be achieved by 3-D demonstration of the data of the 2-D space. The reason is that the visualisation of data in three-dimensional perspective enables understanding of relationships that remain abstract in two-dimensions, allowing 3-D modelling of surfaces other than elevation (z-value) and information analysis. Hence, a more realistic visual display of sectoral complementarities (linkages) conveying systemic unity of knowledge can be shown in the 3-dimension representation in Fig. 7.6. Figure 7.6 shows the prevailing state of linkages (or not) between sectors, taking account of manufacturing sector’s contribution. Hence the Integration component of the IIE-process model can be shown in 3-D approach. In addition, the figure allows an understanding of the existence of complex sectoral interrelationships in their endogenous effects. The visualisation of this type of valuable information remains hidden in the 2-D approach.

Conclusion

155

Matrix Result: Manufacturing (2-D)

Year Range of Matrix Values of (Q, E) by year (1980,1990 and 2000) and sectors

Sectors

Sectoral Contribuon

Fig. 7.5 Sectoral contribution in 2-D surface

Conclusion We have mentioned in this chapter and entire work that objectivity of inquiry in all its deepest context is of the first essence of both moral/ethical and material reality compounded with each other. This ontological principle stands out both for mundane experiences of life and real world phenomenology and for the most abstruse conceptions of mathematics and mathematical sciences. In this regard the objectivity of mathematics and mathematical science rests on the real world inquiry. This domain in other words is the ‘whole truth and nothing but the truth’. So let us use it to explain the divine with unfailing tenacity. Contrarily, other shadows of mathematical analysis, such as the use of complex number and functions are seen as tools. In other words, these shadow attributes of mathematics are necessary precisely to convert the imaginary world into ‘real’ world-system. Imaginary and complex treatments of mathematical functions comprise ‘half-truth’. They must convert by imaginary conjugates into real world phenomena of logic, mind, and real-world realism. Thus in regards to the real-world objectivity of mathematics in the final events of realnumbers and objective reality of our experience in the analytical world-system writes Moschovakis18 : “The main point in favour of the realistic approach to mathematics is the instinctive certainty of most everybody who has ever tried to solve a problem 18 Moschovakis

(1980 , p. 605).

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Sector

Fig. 7.6 State of sectoral linkages in 3-D visual display—between manufacturing and other sectors

that he is thinking about ‘real objects’, whether they are sets, numbers, or whatever.” Such is the meaning of imaging the imaginary into real objectivity. Thus we claim by ontological deduction and its continuity by recursive transference with inductive reasoning that an ultimate objective criterion of the socioscientific evaluations is to be found in the indispensible wellbeing criterion. The substantive meaning of wellbeing lies in its origination from the ontology of unity of knowledge. Then the ultimate objective of life and experience must lie on the quest for reality in monotheism (Tawhid). We have explained such objective embedding of the true and real world of the whole truth and nothing but the truth in regards to the evaluation of the wellbeing criterion. Thereby emerges the large system of inter-causal relations between all variables, entities, and functions. These are entirely endogenous by the sheer dynamics of evolutionary epistemology. The Qur’an (30:11) refers to this phenomenological reality of the evolutionary world-system in its generality and particulars within the evaluation of wellbeing criterion, subject to inter-causality between endogenous representations, by the term khalq in-jadid or khalqa summa yu-iduhu (re-origination).19 The evolutionary epistemology is thus to be found in precisely analytical ways in the Interactive, Integrative, Evolutionary (IIE-learning) properties of the learning world-system of unity of knowledge by inter-causality in the wellbeing criterion as the truly real objectivity of organic unity of the world-system. 19 Qur’an

(30:11):“It is Allah Who begins (the process of) creation; then repeats it; then shall ye be brought back to Him.”.

Conclusion

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In this chapter we have gone beyond the earlier chapter on wellbeing criterion to transcend into the vastly mathematical comprehension of this objective criterion in the domain of true reality.20 The Tawhidi methodological worldview of unity of knowledge as the primal ontological foundation makes such inquiry possible. It transcends over the mainstream constriction of socio-scientific rationalism and economic rationality. It proves the narrowness of the field of shari’ah that cannot answer the truly big questions of the theory of ‘everything’.21 Economics as science shares in this domain of ‘everything’. This is the realm of totality by the mathematical completeness of inter-causal unity of knowledge from Beginning to End.22

References Asutay, M., & Harningtyas, A. F. (2015). Developing Maqasid al-Shari’ah index to evaluate social performance of Islamic banks: A conceptual and empirical attempt. International Journal of Islamic Economics and Finance Studies, 1(1), 5–64. Boulding, K. (1956). General systems theory, the skeleton of science. Management Science, 2(3), 197–208. Campbell, D. T. (1988). Evolutionary epistemology. In G. Radnitzky & W. W. Bartley (Eds.), Evolutionary epistemology, rationality, and the sociology of knowledge (pp. 47–89). La Salle, IL: Open Court. Choudhury, M. A., & Hoque, M. N. (2017). Shari’ah and economics: A generalized system approach. International Journal of Law and Management, 59(6), 993–1012. Choudhury, M. A., & Hossain, M. S. (2006). Development planning for the Sultanate of Oman. Lewiston, NY: Edwin Mellen Press. Choudhury, M. A., Zman, S. I., & Harahap, S. S. (2007). An evolutionary topological theory of participatory socioeconomic development. World Futures, 63(1), 1–15. Choudhury, M. A., Hossain, M., Shahadat, T., & M. . (2019). Islamic finance instruments for promoting long-run investment in the light of the well-being criterion (maslaha). Journal of Islamic Accounting and Business Research, 10(2), 315–339. Hossain, M. S. (2002). A method to reduce flood impact on road transportation systems. Ph.D. thesis, Department of Computation, University of Manchester Institute of Science and Technology (UMIST), U.K, unpublished. Hoste, J. (2005). The enumeration and classification of knots and links. Amsterdam: Handbook of Knot Theory, Elsevier. Longley, P. A., Goodchild, M. F., Maguire, D. J., & Rhind, D. W. (2001). Geographic information systems and science. New York: Wiley. Moschovakis, Y. (1980). Descriptive set theory. Amsterdam: North Holland. Whitehead, A. N. (1978). Process. In: D. R. Griffin & D. W. Sherburne (Trans.) Process and reality (pp. 208–215). New York, NY: The Free Press.

20 Qur’an

(69:1–3): “The Inevitable Reality – What is the Inevitable Reality? And what can make you know what is the Inevitable Reality?”. 21 Qur’an (30:7): “They know but the outer (things) in the life of this world: but of the End of things they are heedless.”. 22 Qur’an (36:36): “Exalted is He who created all pairs - from what the earth grows and from themselves and from that which they do not know.”.

Chapter 8

Meso-economic Framework of Decision-Making

Abstract The theory of evolutionary learning organization carries with it rationalist premises as well as behavioural aspects of decision-making that are increasingly becoming centerpiece of organizational decision-making that has significant impact on social preference formation. Indeed, organizational behaviour in such ethico-economic sense is the carrier of conscious attributes and consequences in the social spectrum where markets, institutions, and behavior interact. In this chapter we will study a special kind of a model of interaction that is different from many conventional ones. The primary difference is caused by the endogenous nature of preferences, decision-making, policies and programs in the ethico-economic frame of conscious decisions. Thus, while economic rationality is still the basis of formulating such organizational behavior, ethics is either considered exogenously or explained under the same postulates of economic rationality, bounded though by a certain slack in full-information. In this chapter, evolutionary organizational decision-making is explained as the process of interaction leading to integration, and thereby into incessant processual reproduction of knowledge as consciousness to establish stronger ethico-economic organizational social systems. This involves serious theoretical formalism belonging to behavioural aspects of organizations, institutions, and moral social reconstruction. Thus the goal of a technical meaning of wellbeing is studied. The structure and function of these entities in ethico-economic decision-making are explained.

Objective Conventional organizational behaviour is premised on two fundamental axioms. Firstly, the axioms comprising economic rationality are carried through in treating an ethico-economic view. Secondly, ethics is permanently treated as an exogenous factor in ethico-economic decision-making. Even when evolutionary dynamics is involved in the study of organizational ethico-economic behaviour, the models are of the type of social Darwinism. Among the last kind of studies that will interest us in

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2020 M. A. Choudhury, Islamic Economics as Mesoscience, https://doi.org/10.1007/978-981-15-6054-5_8

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this chapter are premised on the epistemologies forwarded by Popper (1988) in falsification dialectics; Jackson (1993) in system theory; Soros (2000) in Popperian type nature of unmeasured uncertainty of the financial world; Edel (1970) in the scientific treatment of ethics; and Choudhury (2004) on endogenously learning organizations as an exception to the exogenous treatment of the same. The focus in this chapter is on a critical examination of several such works and the formalization of evolutionary learning organizational behaviour under the episteme of unity of knowledge. The objective of this chapter is thus to expound the interactive, integrative, and evolutionary model (IIE-model) of organizational behaviour. The epistemological basis of such a methodology of decision-making is constructed upon and derives its conscious framework of behavioural perspectives plus decision-making from unity of knowledge. Besides, such an episteme is instrumental in constructing the unified world-system, which in the case of our discourse in this chapter, is the synergistic intermingling of the ethico-economic, conscious, and organizational framework within institutionalism and the moral social reconstruction. The review of the literature is subsumed in the discourse of various works considered in the context of this chapter. No separate section is therefore allocated.

Introduction: Some Definitions We commence this chapter by definitions of some key concepts that will be used throughout the content of this chapter.

Evolutionary Learning Evolutionary models limited to bounded rationality and dialectical episteme are those of Simon (1960) and Jackson (op cit). Yet such models reflecting organizational behaviour are ad-infinitum evolutionary learning models not having any particular convergence into a unified worldview of the human future, except into rationalism. Rationalism bears down into bounded economic rationality and a conflicting and competing dialectical paradigm of evolutionary processes. The rational economic behaviour of maximizing objective criterion functions under bounded, limited, or incomplete information (hence incompleteness of knowledge) drive the formal part of the endemic models. While these are scientific approaches for studying efficient management, organizational and institutional behaviour (Feiwel, 1987) the resulting implications of optimal decision-making must necessarily depend upon complete information, even though within a bounded space. Such bounded space in time and continuity of the human world-system are propelled forward from one to subsequent processes by means of dialectical learning in which any appearance of ethics is caused by exogenous role of consciousness. Not being endogenous, the role of consciousness in a

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systemic sense of causality is not sustainable. At every juncture of the dialectical process there appears an exogenous interdiction. This proves to be institutionally costly in terms of transaction cost; and is not self-actualized by conscious behaviour and discursive practice. The continuity process of endogenous and complex organizational, and institutional and social behaviour requires regeneration of resources automatically to engender the evolutionary learning processes across knowledge, space, time and the systemic continua. If we exemplify such continuous knowledge regeneration by means of technology and innovation in such evolutionary learning models, then, such artefacts become endogenous in nature. The consequence on resource regeneration is the continuous and compounded effect of all endogenously relational artefacts in knowledge regeneration. The impressive example of such continuously regenerated knowledge-induced reproduction of resources is found in Information Technology. Here both the input and output of IT are knowledge-flows. By the perfect elasticity of supply and demand of IT, the unit cost of such reproduction and continuity of the knowledge-centered input-output production function causes unit cost to decline on an asymptotic average cost curve. This curve is called the learning curve, but without the endogenous effects of and in IT. Consequently, in IT form of models of learning behaviour, the exogenous nature of innovation and technology as in neoclassical treatment of human capital theory and evolution (Nelson & Winter, 1982) is replaced by the simulation nature of evolutionary learning. Consequently, the assumptions of scarcity of resources; thereby, the axioms of full-information (bounded information), optimal resource allocation, and steady-state nature of closed equilibrium prevail. The formalism given by Simon type models of man (Simon, 1957) is carried over and changed over time. But learning remains unchanged under all the rationality axioms ad-infinitum. Yet, time is not an input of the production function of any kind. Time is treated as an independent variable connected with the measurement of change. Time is not the cause of change. Time is simply the momentary recorder of change. There is yet another superlative cause of the inability of technology, innovation, information, and knowledge as compounded effects in the realization of continuous abundance of resources. That is, in the Interactive Integrative Evolutionary-model (IIE), the dialectical process of evolutionary learning converges at every point in time to the goal of unity of knowledge and its constructive effect of the unified world-system. This is a critical factor for the IIE-model. Without this critical nature of the formalism the uncharted evolution by the dialectical processes premised only on rationalism causes transaction costs of conflicts and exogenous technology to abound. Sustainability of the evolutionary system is lost. Such is not the property of endogenous learning behaviour in the presence of endogenous technology. Discourse and consensus in organizational, institutional, and social systems generate simplified perspectives of development, yet by the

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complexity of IIE-type decision-making. Transaction costs are thereby reduced (Williamson, 1979; Choudhury & Harahap, 2007).1 The consequential types of endogenous growth models that can be read and implied from the works of Shakun (1988) and Romer (1986) are premised on competition, and thereby, on competing behaviour. Such neoclassical consequences imply the continued forms of exogenous technological effects. At best, technology can be endogenous to the extent that evolutionary learning behaviour in such a case yields subsets individually governed by the neoclassical axiomatic characteristics. Exogenous dialectical effects are required to start off a new decision-making and rational choice phase. The optimality and steady-state conditions in such a world-system are used as fictive to solve problems, which though have not been designed by human agents and organizations (Shackle, 1971). In the nature of the evolutionary world-system studied in the literature, Myrdal (1958) and Schumpeter’s (Gaffard, 2009) innovation theory in economic development give better examples of evolutionary technological effects. Such models belonging to organizational, institutional, and social behaviour and their consequences provide the concept of sustainability. But the question regarding the conditions of wellbeing, namely economic stabilization, employment and entitlement, ethics and discursively generated consensus, are not to be found in the inherent conflicting scenario of ethico-economic development paradigms that emerge from these models. The organization embedded in such an evolutionary learning behavior of the economy at large transforms by the participatory nature of decision making between institutional members and the wider interactive network but without the discursive precondition leading to social consensus. The critical variables inherent in the ethicoeconomic cross-cultural and social choices of the total decision-making framework of the organization are interactively relational in nature. But these are interactive to the extent of the drive of rationalism (economic rationality) of self-interest generating and being driven by competition and segmented forms of reproduction of resources to take out the rationalist assumption of scarcity of resources.

1 Check this result on continuity of resource generation in knowledge-induced continua of systems:

Let resource function be R(θ) = R(x(θ)), where, x() denotes the vector of output, price, income, technology and other pertinent variables. Now, dR/dθ = i (∂R(θ)/∂xi (θ)) · ((dxi (θ))/dθ) > 0 identically by each i. Consequently, the first order condition of optimal allocation of resources does not hold. Furthermore, each xi is related by circular causation with xj and = F(x(θ)) in the form of resources as input and output being both knowledge functions. Besides, the circular causation interrelated system between (θ, x(θ)) is given by, xi (θ) = fi (xj (θ)), i=j = 1, 2, … But furthermore, if θ ∈ Rationalism (bounded and evolutionary economic rationality), then dR/dθ → ∞; or dR/d = 0, for exogenously segmented sequences of evolutionary systems.

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IIE-Perspective in Evolutionary Learning Returning back to the IIE-model, the phenomenon of continuous evolutionary learning in unity of knowledge and its construction of the normative world-system premised on unity of knowledge assumes an altogether different form. The IIEmodel is critically driven by the method of circular causation. This method explains the inter-variable causality, each variable in terms of the rest. Such inter-variable causality of each variable in terms of the rest of the variables gives the methodical meaning of unity of knowledge shown by complementarities between the variables. Knowledge, which remains continuous and never ending in the evolutionary learning behavior of organizations that perpetually sustain themselves with innovation, technology, and unifying linkages between the critical variables emanate from a certain textual premise. This denotes the epistemological mooring of the entire methodology and driving method emerging from and endogenously sustaining the IIE-system. While this is an issue that remains an open search for discovery, its discovery would mark the ultimate convergence to a particular ontological and practical worldview. By it all reasoned premises can be tested. Such a unique and universal epistemological premise is unity of knowledge. It is governed by the universal praxis of IIE-methodology and its method. The methodology combined with the method of circular causation is capable of explaining the differentiated and dissociative worldview of every other doctrine (rationalism). While such a knowledge-centered epistemological worldview is found in the ideal case of the monotheistic law and its application in the world-system, particularly in this chapter to organization, institution, and society and their behavioural perspectives, the same kind of depiction is found also in scientific theory (Einstein, undated; Edel, 1970).

Wellbeing Criterion The methodical premise to encapsulate the unified methodological worldview is the wellbeing function. It forms the objective criterion function of the social entirety. This entirety comprises micro-cosmos and the totality of organizations, institutions, and society, along with the circular causation relations between them in both the fallen state of the world-system, and the normative moral constructive possibility out of the episteme of unity of knowledge. The emergent sustainable evolutionary learning process with its objectivity of interactive social and economic relational becoming, establishes the relational idea of organic unity between the diverse variables and entities in decision-making. The positivistic evaluation (‘as-is’) is followed by the normative evaluation (‘asit-ought-to-be’) of the wellbeing function subject to the circular causation relations in the selected critical variables yield the worldly signs of the nature of monotheistic, and thereby, symbiotic unity of knowledge by way of pervasive complementarities (participation) in thought and practice underlying the epistemic methodology and

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its application through the evaluation of the wellbeing function, subject to circular causation relations between the variables. This totality of the methodical IIE-model is the derivation from and projection of the sustained process of unity of knowledge into the details of the world-system. Organizations ought to display this spirit by way of its discursively networked consensus by interaction. Institutions should show it by the complex networking of such participatory institutions driven by the proper definition and aspirations of wellbeing. Society ought to show it by the complex aggregation of the organizational and institutions preference formation into dynamic social formation (Rawls, 1971). The same idea of evolutionary learning can be equally applied, as per the symmetrical methodology, to negative learning. Positive and negative learning are dialectical forms of intellection in social formation. Adorno (2007, pp. 5–6) defines such a social dialectical process as follows: “Dialectics is the consistent sense of nonidentity….. that whatever happens to come into the dialectical mill will be reduced to the merely logical form of contradiction…. What we differentiate will appear divergent, dissonant, negative for just as long as the structure of our consciousness obliges it to strive for unity: as long as its demand for totality will be its measure for whatever is not identical with it. This is what dialectics holds up to our consciousness as a contradiction.” Examples from the world of learning organization that examine heterodox models of cooperation is opposed to competition in forming social choices along with private objectives. Kim and Mauborgne (2005) study such contrary types of organizations. The competition model is the traditional neoclassical and mainstream economic and management models of competition and self-interests arising from scarcity of resources, and all the consequences that are carried along with it. This is the redocean strategy of the capitalist business and management world-system. On the contrary, there is the blue ocean strategy (social extensions formed by networking and participation) that defeat the objectives of the red ocean strategy by its cooperative and coordinative strategic future worldview. The evolutionary learning objective of sustainability by the method of evaluation and regeneration of the unified world-system in which organizations, institutions, and society play their symbiotic roles is the wellbeing function premised in epistemic unity of knowledge.The networked organization, institutions, and social order are the cause and effect in inter-causal circularity between the participatory (complementary) variables denoting ethical, economic, and social decision-making. The resulting symbiotic results overarchacross embedded domains.The emanating methodology in its entirety with methods and inferences, and normative directions, uses a substantive meaning of endogenous knowledge-centered compounding between innovation and technological change.

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The Analytical Nature of Endogenous Opposed to Exogenous Effects in a Firm’s Production Function The different effects of endogenous as opposed to exogenous relations in the wellbeing objective of these opposite kinds of organizations can now be formalized. The firm as an organization is a productive organism. The difference between the red-ocean and blue-ocean is this. The variables, and thereby the choices of productive organisms are induced by the inputs of knowledge and social precepts, such as of pricing, marketing, avoidance of impediments from the road of the underprivileged, distribution and just ownership of resources, wealth, and income, and opportunities and the like. Participatory empowerment, entitlement, discursive cooperation, and expansion of the resource sharing bases along with the consciousness and policies to engender such possibilities form the inducing factors of productive choices. A further example of such kind of contributions by productive firms as organizations in the midst of institutionalism and social correctness is the establishment of dynamic basic-needs regimes of development. All the elements of the endogenous processes of the IIE-methodological worldview now enter lock, stock, and barrels into the model and dynamic basic-needs regime of development. Yet another example in the structure of organizations, institutions, and social order is the multidimensional unitary model of stakeholder participation, beyond simply a shareholder corporate model. In the imminent multidimensional stakeholders” model of corporation the interrelated and coordinated interests of shareholders with the community and society in the light of the wellbeing objective criterion is projected. The emergent social model of wellbeing and development, justice, equality, and unity by discursive participation is formalized according to the evolutionary learning system and cybernetic model that spans continuously both intra-system (firm) and intra-system (community, society and network). Such a model is dealt with by Lozano (2000, 2002).

Formalism of the Evolutionary Learning Wellbeing Function in Unity of Knowledge Here is a formalism of the production function induced by epistemic knowledge-base, {θ}. {θ}-values denoting unity of knowledge and its capability to establish a unified order of organization, institutionalism, and social order, denote the ethico-economic and social variables as consciousness that is endogenously generated. Y = F(K, L)[θ],

(8.1)

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where, Y denotes output; K denotes capital stock as factor input; L denotes labour input as factor input. Each of all these variables is induced by knowledge to denote evolutionary learning. Consequently, the production function denoted by (8.1) loses all its properties of neoclassical model of optimization, steady-state equilibrium, marginalist trade-off between labour and capital, and assumption of resource scarcity. We can now express the production function and its derived factor demand functions by expressions (8.2)–(8.6). Y increases as a result of learning (θ1 ) with L. By the endogenous relationship of circular causation between the variables denoting the implication of unity of knowledge by participation (complementarities) we write, K = K(θ2 , L(θ1 )).

(8.2)

Likewise, it is true of L in terms of K, i.e. L = L(θ1 ,K(θ2 )).

(8.3)

Y = F(θ1 , θ2 , K(θ2 ), L(θ1 ))

(8.4)

θ1 = f1 (θ2 , K(θ2 ), L(θ1 ) ;

(8.5)

θ2 = f2 ((θ1 , K(θ2 ), L(θ1 )) .

(8.6)

Thereby,

Also,

Expressions (8.1)–(8.6) altogether denote the endogenous growth model. By the pervasively complementary effect of the knowledge-variable and the simulative nature of evolutionary learning in the consequential system, the neoclassical properties are annulled. These equations explain the recursive relationship that do or ought to define the inter-relations between critical variables of the knowledge-induced endogenous production function. In one sense, the power of owners of capital denoted by K(.) is made to depend upon a coordinative organizational arrangement between the institution of labour force and the owners of capital. Harmony between these two agents of production system spells out harmony in collective bargaining and coo-operative organizational behaviour. Lack of positive complementarities from

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the direction of K(.) and L(.) and from the direction of L(.) and K(.) recursively imply the two-pronged productive and co-operative relations that ought to exist in a two-agent game theoretic move. Besides, these variables being knowledge-induced in the sense of unity of knowledge, and thereby IIE-relations, show that the game theory if a co-operative game with knowledge induction in the payoffs to labour and capital out of such co-operative game-theoretic moves (Osborne & Rubenstein, 1994; Shubik, 1989). Besides, the induction of the economic variables by (θ1 , θ2 ) introduces ethical, social, and discursive social, economic, policy and institutional impacts on the resource allocation rules. Such induction of the socioeconomic variables makes them of the ethico-economic type. The neoclassical conceptions cannot hold any more. Every point of the knowledge-induced production possibility surface experiences continuous perturbations caused by evolutionary learning. Such continuous variations in the historical lives of organizations and the continuity of mathematical notion of organization of decision-making are necessary in order to bestow freedom of industrial democracy in labour-capital discourse to set the agreements of the IIE-process model in organizational behaviour. Coercion in organizational decision-making is thus avoided and a discursive environment of co-operative decision making is upheld with different ordinal vales representing respective agent-specific knowledge-values, θ1 and θ2 . This is true in the continuous and continuum frameworks intra-system and inter-systems. As a result, the concave to the origin production possibility surface cannot exist anymore. Scarcity of resources as axiom, and consequentially optimization behaviour and steady-state equilibrium cannot exist anymore. Therefore, both the neoclassical property of steady-state equilibriums and their long-run ‘global’ properties are annulled. Hicks (1979) had pointed out this problem of neoclassical equilibriums. Finally, no marginal substitution formula, and no price relatives can exist in such a case of evolutionary learning. Finally, the nature of the output and resources (as proved in a footnote earlier) are knowledge-induced out of the dynamics of IIE-processes forming consensus between all the variables. The output and resource variable now figure out as the instruments of cause and effect in the co-operative decision making between the factor inputs of production. The final rounds of coordinated and co-operative endogenous and institutional (policy and ethico-economic behaviour as consciousness) are established and the evolutionary learning organizational life sustained by the role of knowledge-induction.

A Generalized Form of the Structure and Functions of Evolutionary Learning Organization, Institution, and Social Order Generalization of the above formalism takes us to the design of the institutional and social super-organizational structure. Here is that symbiotic systemic outlook. This is

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the openness by evolutionary learning of the increasing set of influencing variables, and thereby, the pervasiveness of complementarities between the knowledge-induced variables. The example of such an organization is a participatory Islamic enterprise (Choudhury & Hoque, 2006). Its objectives along with the emanating structure and functions are premised in unity of knowledge and its organizational, institutional, and social induction of unity of knowledge. Let us define the following vector of variables of the wellbeing criterion that is now evaluated (i.e. ‘estimation’ followed by ‘simulation’) by the wellbeing function, subject to the system of circular causation variables:   x(θ) = x1 , x2 , x3 , x4 , x2 , x6 , y1 , y2 , y3 , y4 , p1 , p2 , p3 , p4 ; p2 [θ]

(8.7)

[θ] x1 x2 x3

means induction of each and all of the variables within {..}. denotes employed labor force in the co-operative enterprises. denotes capital input employed as complementary factor to x1 . denotes output in accordance with the ethical correctness. This is determined by the objective and purpose of the Islamic law, known as maqasid as-shari’ah. x4 denotes profits in accordance with maqasid as-shari’ah. x5 denotes shareholders’ wealth for safeguarding and enhancing productive activities in accordance with maqasid as-shari’ah (stakeholders model).The technological and innovation effects in the light of the knowledge-induced objective can be included. x6 denotes equitable distribution of the organization’s productive resources, which takes place by the use of participatory trade-related financing instruments in the absence of interest-bearing business operations. y1 denotes participatory financing instrument of profit-sharing. y2 denotes financing instrument of equity-participation. y3 denotes the financing instrument of mark-up pricing in traded goods over time. y4 denotes other Islamic financing instruments (Rosly, 2005). p1 denotes policy variable by discursive process. Such a discursive experience also seeks to find possibilities for complementarities between the members of x(θ)-vector. p2 denotes number (ratio) of co-operative enterprises existing in inter-firm network. p3 denotes number (ratio) of co-operative enterprises existing in inter-sectoral linkages. p4 denotes human resource development expenditure. p5 denotes transparency and disclosure in firm”s accounts, investment financing, and shareholders” profitability. Each variable is induced by the discursive knowledge-flows denoted by {θ}-values. Such an induction transforms the variables into ethico-economic variables by the epistemic reference of unity of knowledge. In this vector expression the differentiated values of θ1 , θ2 , are replaced by the common limiting value of these discursive

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parameters. Thereby, the probability limit of the two discursive knowledge variables leading to one consensual unity of knowledge is defined by, plim{θ1 · θ2 } = θ.

An Example of Evolutionary Learning by Unity of Knowledge: The Islamic Social Wellbeing Criterion of the Corporation The principal objective of the Islamic organization is to simulate its shareholders’ profits within the stakeholders’ purview. Such a goal enables the firm as organization to abide with maqasid as-shari’ah. As exemplified above, the vector of variables spans over economic, social, ethical and policy variables. The wellbeing function is evaluated first by estimating the circular causation relations to test the existing nature of complementarities between the maqasid-variables, subject to circular causation relations. It then simulates by policy and program implications, the possibilities to improve the levels of complementarities between the variables. The choices so determined form the ethical moral social choices according to the progressive actualization of maqasid as-shari’ah. Because of its moral and social choice nature, such a wellbeing function is equivalent to serving al-maslaha-wal-istihsan, meaning wellbeing for the public purpose (Masud, 1995). The emergent wellbeing function is then seen as the objective criterion to measure the degree of simulated unity of knowledge in the organizational system and its inter-systemic complementarities realizedby epistemic reference to unity of knowledge. One needs to note that maqasid as-shari’ah simply defines the principal goals and objectives of the shari’ah. Yet the shari’ah consequences that follow do not necessarily reflect abiding perspective of epistemic oneness. The shari’ah functions thereby remain revisable, changeable, and debatable in the idea of ‘shari’ah-compliance’. It is just the purpose and objective (maqasid as-shari’ah) that remains permanent. Yet these too can be extended to an expanded domain to acquire the epistemic focus of unity of knowledge. The wellbeing function, W(x(θ)) now yields the formal evaluative model below. Simulateθ W(x(θ))

(8.8)

subject to circular causation relations improvising complementarities, Zi = fi (θ, zi )[θ], i = i = 1, 2, . . . , 14

(8.9)

θ = f(z(θ))

(8.10)

The following particular form of the non-linear and endogenously interrelated wellbeing function system in the variables of vector (8.1) can be used to incorporate all the required properties of endogenous and complex characteristics of IIE-model:

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W(x(θ)) = A(θ) · i xai i

(8.11)

xi = Ai (θ) · i = 114 xi ai

(8.12)

θ = B(θ) · i=1 15 xi ai

(8.13)

The expressions (8.8)–(8.13) emulate the meanings underlying the formulation of expressions (8.1)–(8.7). Each of the variables, and thereby the representative agents, being knowledge-induced according to the episteme of unity of knowledge is simulated for better levels of co-operation, co-ordination, and thereby participation and complementarities in evolutionary learning organizations. The end result is to transform the organization not merely into a decision-making medium of production and strategy, but also as a social organization in the midst of consciousness. In such a comprehensive understanding of organization and organizational behaviour, the objective of wellbeing plays the central role for evaluation of the consciousness of participative behaviour, likewise complementary relationship between the ethically selected variables.

How the Evolutionary Learning Parameters of Knowledge-Flows {θ} are Generated and Assigned? θ-values are generated from the recorded socioeconomic variables or are surveyed for data on respondents’ attitudes. Such generated θ-values reflecting the prorated degree of complementarities along the column socioeconomic x(θ)-variables are then averaged across the their ranked values in columns of the generated θ-values to yield the required generated data for such ranks as knowledge (unity of knowledge, θ-values) corresponding to the columns of observed variables. With such generated θ-values, the table of all required data by socioeconomic variables, x(θ) and generated θ-values is complete. The estimation and simulation in this order of the whole system of Eqs. (8.8)–(8.10) or equivalently of (8.11)–(8.13), can be carried out. Thereby, the detailed statistical work can be completed, yielding the comparative estimated (actual) and simulated (normative, policy-induced) coefficients and the corresponding predictors of the x(θ)-variables in the structural regression forms of circular causation equations. Expressions (8.11) and (8.13) are monotonically related, as they are ‘similar’ functions. Therefore, expression (8.13) represents the monotonic positive transformation of the wellbeing objective in unity of knowledge with possible degrees of complementarities between θ-variable and x(θ)-variables. Expressions (8.10) and (8.13) represent the empirical version of expression (8.8) and (8.11), respectively.

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Therefore, there is no need for independently estimating and simulating expressions (8.8) and (8.11) once the systems (8.9)–(8.10) or (8.12)–(8.13) are estimated, respectively. According to the Islamic methodological worldview in the framework of unity of knowledge according to the foundational epistemological sources of Islamic thought, and thereby, organizational behaviour. The organizational model presents an intrinsic mind-set of the Islamic organization. The imminent system diagram here can be shown in the light of epistemic oneness arising from the foundation of Islamic belief. This pervades the organizational structure, function, and behaviour in the Islamic case of its methodological worldview.

Dynamic Preference Formation in Islamic Corporate Relations Evolutionary learning as phenomenology in respect of unity of knowledge, and prevailing across continua and continuously over time, gives rise to dynamic preferences. Such dynamic preferences form aggregate interactive and evolutionary consensual preferences at the next and progressive higher levels of social entities— from organizations to institutions to society at large. Dynamic preferences by the logic of failure in steady-state due to complexity, deny all the postulates of neoclassical economics. Now to formalize we denote {℘ ij (θi )} as (θ)-induced organizational preferences; ‘i’ denotes a given decision-making process. ‘j’ denotes jth-numbered θ-induction of socioeconomic variables; i = 1, 2, … n; j = 1, 2, … m. The evolutionary learning vector of variables by knowledge-induction is denoted by, {θi , xij (θi ); ℘ ij (θi )}. This means interactive preferences in the milieu of organizational decision-making (i), each of these processes involving j-number of simulated variables (j). Interaction (∪i ) is explained by the mathematical union of intersection of knowledge and space and time domains of causation of events certified by consensus (∩j ). Thus we denote alearning process denoted by (Ps ) = [∪i ∩j {θi , xij (θi ); ℘ ij (θi )]s . These aspects of organizational decision-making model present the perspective of unitary and discursive learning model. The formalism underlying all the imminent representations in the context of dynamic organizational preferences with symbolism means that collective decision making is realized by internal dynamics connected inseparably with external dynamics of conscious decision making. Internally, the various departments of the organization form of discursive agents for internal consensus formation by the same kind of limiting knowledge premised in unity of knowledge that we explained earlier. That is, plim{θ1 , θ2 , … θn } = θ, with i = 1, 2, … n number of departments (agents) in IIE-decision making. θ denotes the consensual value of knowledge premised in unity of knowledge.

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External dynamics joins with the internal dynamics via the stakeholder model of organizational decision making. Thereby the IIE-model is extended to this larger set of agencies, relations, variables and ethical choices as mentioned above. The mathematical representation in terms of (Ps ) = [∪i ∩j {θi , xij (θi ); ℘ ij (θi )]s is thereby extended to stakeholders. So also the degree of complementarities and participation extended to cover the stakeholders by extending plim{θ1 , θ2 , … θm } = θ, with i = 1, 2, … m > n. The conscious organizational behaviour as truly an entity in industrial democracy becomes a social practice and the consequential evolutionary learning organization a social entity with ethico-economic effects. At the end, the definition of a conscious organization and organizational behaviour with ethical choices arises. Such an organization is now seen as the strategic economic entity that galvanizes the ethical choices, strategies, and decision making across the social spectrum as stakeholders. The choices determined in the particular case of the Islamic organization and organization behaviour is determined by the discoursed injunctions of the Tawhidi methodological worldview. In the end, the ethico-economic organizational behaviour in the midst of the above extensions is defined by the following relations: (Ps ) = [∪i ∩j {θi , xij (θi ); ℘ ij (θi )]s ; plim{θ1 , θ2 , … θm } = θ, with i = 1, 2, … m > n. The meaning here conveys the most extensive degree of participation and complementarities between agents and their represented variables of maqasid-choices. Such choices simulate the wellbeing function in a discursive environment of cause-effect circularity explaining the dynamics of unity of knowledge. The wellbeing objective was given in expression (8.8)–(8.13). This model is now further extended to society at large, etc.

Questions Relating to Islamic Evolutionary Learning Model of Organizational Behaviour Is the organizational behavioural model truly unique and universal for all decisionmaking systems? At this point we can render a brief answer to this question. Firstly the concept of uniqueness and universality issues that the Islamic epistemic phenomenology of unity of knowledge invokes is this: The imminent IIE-model explaining the methodology and method of evaluation of the unity centred worldsystem, i.e. the organization, institution, and social order can equally explain unitary phenomenon and differentiated social and economic phenomena. So it is possible to derive the postulates of say neoclassicism from the degenerate non-learning (call this ‘de-knowledge’) framework of the IIE-model. But on the contrary, neoclassicism, and for that reason, any of the other paradigms, some of which we have covered in this chapter, cannot explain the nature of the pervasively unified methodology and worldview of unity of knowledge. Thereby, the question of uniqueness and universality comes to a head. One can refer to details on these topics in Choudhury’s work (2006) in respect of understanding reality oppositely between occidental episteme of rationalism and the Islamic epistemology of unity of knowledge.

Questions Relating to Islamic Evolutionary Learning Model of Organizational Behaviour

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The Quràn refers to this episteme of oneness as Tawhid. It stands for the entire meaning of monotheism concerning the oneness of God, the divine law, and the unified world-system. The world-system is configured by its generality and details (e.g. evolutionary learning organization and organizational behaviour). Such a configuration is given the meaning and evidences unravelled by application of the monotheistic law (i.e. by unity of knowledge). In the neoclassical and rationalist world-system, which are carried over to organizational, institutional, and social behaviour, the knowledge-induction of the vector of variables concerning the generality and specifics of the organizational worldsystem do not exist.2 In other words, there is no methodology in such paradigms to transform the social order and all details within it from the domain of resource scarcity, competition, self-interest, and marginal substitution between competing variables and agents, into a social world-system governed by unity of knowledge. If such a social and ethical transformation was even tried in the rationalist methodology, it will break down the neoclassical postulates to dysfunction. Neoclassicism then disappears into methodological impossibility for transforming a differentiated world-system into a socially participative world-system by unity of knowledge (as under monotheism). Even if resource regeneration is considered in neoclassical economics, the scarcity postulate is not abandoned on logical grounds pertaining to neoclassicism. That is as the footnote3 here points out, organizations with satisfycing behaviour must still depend upon independently invoking given technology to restart resource formation and utilization. Continuity of resource reproduction is thereby abandoned (Simon, op cit). Likewise, in the pure dialectical form of evolutionary phenomenon with no closure, Marx’s ‘over-determination’ theory of dialectical choices (Resnick & Wolff, 1987) and Popper’s (1965) conjectural history of falsification and perturbations 2 Note

this explanation on the impossibility of continuously regenerating processes as given below. At the boundary of the two processes shown, technological induction by T remains exogenous. Contrarily, if T becomes endogenously regenerated then optimization fails to exist. This defies the postulates and consequences of optimization, steady-state equilibrium, opportunity cost theory, and assumption of scarcity of resources. Hence the objective of wellbeing as technically defined in this paper is annulled.

3

Process 1 (P1) Process 2 (P2)    [Resource → Output → Inputs →]T [New Resource R → etc . . . .] In the case of endogenous relationship, P2 = f(P1), f being a continuously differentiable functional relationship between P1 and P2, which are functions of (R, O, I) and (R’, O’, I’), respectively, as shown. That is P2 is continuously regenerated by P1 etc. within system relations. We write, dP2/dP1 = (dP2/dT) · (dT/dP1). This can take two possible signed values: (1) T is exogenous. Then dT/dP1 = 0. Hence, dP2/dP1 = 0; implying P1 and P2 are relationally independent as exogenous processes. (2) T is endogenous. Then, dP2/dP1 = 0. In this case an optimal process at the connection of T does not exist or is evanescent. The functional relationship is then given by, P2 = f1 (P1, T); P1 = f2(P2, T); T = f3 (P1, P2). This is the kind of wellbeing organic interrelationships. They are studied by the circular causation method that we have presented in this chapter.

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bedevil the possibility for predictability and objectivity. Such approaches leave the imminent models of dialectics incapable of solving any problem. Organizations governed by such kinds of dialectical epistemologies remain utterly uncertain, volatile, and ethically benign without conscious direction beyond rationalism.

Conclusion The theme of this chapter is a contribution in the direction of evolutionary economics and organizational behavioural theory of decision-making. This academic area is found to be deeply ingrained in epistemological questions. The epistemological questions arise from the side of occidental worldview and the Islamic methodological worldview of unity of knowledge. This leads into comparative and contrasting perspectives of organizational realities from the two vantage points and epistemological thinking. This chapter has presented various models in the occidental perspective and the prominent one in Islamic context that is premised on the qur”anic episteme of unity of knowledge. This epistemological foundation is referred to as the monotheistic methodological worldview of Tawhid as the qur’anic law. The monotheistic law presents its evidences of unity of knowledge in the details and particulars of the worldsystem. The implications of such contrary episteme lead into critical examination of the themes of consciousness and ethico-economic consequences (Sen, 1988), but now focused on organizational behaviour, which were unable of examination in contemporary literature on organizational behaviour. Thus by integrating conscious and ethical organizational behaviour with evolutionary learning model of unity of knowledge an altogether new field of evolutionary economics of organization and organizational behaviour in unity of knowledge has been opened up by this chapter. Many relevant issues, most pronouncedly of decision making, are studied in the light of the the greater domain of organizations network within institutions and society at large. The business organization in this network is thereby studied as a social organism. Various models underlying such decision-making are referred to. In the end, the possibility of a truly ethico-economic form of organization and organizational decision-making as an epistemological issue is examined in the context of unity of knowledge to be found in Islamic methodological worldview. This too is a contribution in the field of Islamic organizational theory of economics as a learning sub-system of the human world-system. Islamic economics has not at all touched this area in the light of the episteme of unity of knowledge forming the intellectual foundation. In this chapter, this kind of organization and organizational behaviour were studied by invoking the episteme of unity of knowledge and its symbiotic implications in the totality of the unified world-system as a distinctive contribution to the field of Islamic economics as well as general evolutionary learning theory in mainstream intellection. Substantive differences between the Islamic episteme of unity of knowledge and the occidental episteme of rationalism were found to persist. Such differences denied the concept of universality and uniqueness of a worldview to

Conclusion

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Occidentalism. Whereas, it made it possible in the Islamic epistemological context but remained distanced from shar’ah as understood in sectarian divide and in the existing understanding of Islamic economics.

References Adorno, T. W. (2007). Introduction. In Negative dialectics (pp. 5–6). New York, NY: The Continuum International Publishing Group, Inc.. Choudhury, M. A. (2004). Learning systems. Kybernetes: International Journal of Systems, Cybernetics, and Management Science, 33(1), 26-47. Choudhury, M. A. (2006). Science and epistemology in the Qur’an (with different generic titles by volumes) 5 vols. Lewiston, New York: The Edwin Mellen Press. Choudhury, M. A., & Hoque, M. Z. (2006). Corporate governance in Islamic perspective. CorporateGovernance, the International Journal of Business in Society, 6(2), 116–128. Choudhury, M. A., & Harahap, S. S. (2007). Decreasing corporate governance in an ethico-economic general equilibrium model of unity of knowledge. Corporate Governance, the International Journal of Business and Society, 7(5), 599–611. Edel, A. (1970). Science and the structure of ethics. In O. Neurath, R. Carnap, & C. Morris (Eds.), Foundations of the unity of science. Chicago, ILL: University of Chicago Press. Einstein, A. (undated). The laws of science and the laws of ethics. In Essays in physics. New York, NY: Philosophical Library. Feiwel, G. R. (1987). The many dimensions of Kenneth J. Arrow. In: Arrow and the foundations of the theory of economic policy (pp. 1–116). London, England: Macmillan. Gaffard, J. (2009). Innovation, competition, and growth: Schumpeterian ideas within a Hicksian framework. In U. Cantner, J. Luc Gaffard, & L. Nesta (Eds.), Schumpeterian perspectives on innovation, competition, and growth (pp. 7–24). New York, NY: Springer. Hicks, J. (1979). Causality in economics. Oxford, England: Basil Blackwell. Kim, W. C., & Mauborgne, R. (2005). Blue ocean strategy. Boston, MA: Harvard University Press. Jackson, M. C. (1993). Systems methodology for the management sciences. New York, NY: Plenum Press. Lozano, J. M. (2000). Ethics and organization understanding business ethics as a learning process. Dordrecht: Kluwer Academic. Lozano, J. M. (2002). Organizational ethics. In L. Zsolnai (Ed.), Ethics in the economy, handbook of business ethics (pp. 165–186). New York, NY: Peter Lang. Masud, M. K. (1995). Shatibi”s life and works. In Shatibi’s philosophy of Islamic law. Islamic Book Trust: Kuala Lumpur, Malaysia. Myrdal, G. (1958). The principle of cumulation. In P. Streeten (Ed.), Value in social theory, a selection of essays on methodology by Gunnar Myrdal (pp. 198–205). New York, NY: Harper & BrothersPublishers. Nelson, R. R., & Winter, S. G. (1982). An evolutionary theory of economic change. Cambridge, MA: The Belknap Press of the Harvard University Press. Osborne, M. J., & Rubinstein, A. (1994). A course in game theory (pp. 219–22). Cambridge, Massachusetts : The MIT Press. Popper, K. (1965). Conjectures and refutations: The growth of scientific knowledge. New York: Basic Books. Popper, K. (1988). Natural selection and the emergence of mind. In G. Radnitzky & W. W. Bartley III (Eds.), Evolutionary epistemology, rationality and the sociology of knowledge. La Salle, IL: Open Court. Rawls, J. (1971). A theory of justice. Cambridge, Massachusetts: Harvard University Press.

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Resnick, S. A., & Wolff, R. D. (1987). Knowledge and class, a Marxian critique of political economy. Chicago, IL: The University of Chicago Press. Romer, P. M. (1986). Increasing returns and long-run growth. Journal of Political Economy, 94, 1002–1037. Rosly, S. A. (2005). Critical Issues on Islamic banking and financial markets. Dinamas: Kuala Lumpur, Malaysia. Sen, A. (1988). Conduct, ethics and economics. In On ethics & economics (pp. 88–89). Oxford, UK: Basil Blackwell. Shackle, G. L. S. (1971). Epistemics & economics. Cambridge, England: Cambridge University Press. Shakun, M. F. (1988). Evolutionary systems design policy making under complexity and group decision support systems. Oakland, CA: Holden-Day Inc. Shubik, M. (1989). Cooperative games. In J. Eatwell, M. Milgate, & P. Newman (Eds.), The NewPalgrave: Game theory (pp. 103–107). New York, NY: W.W. Norton. Simon, H. A. (1960). Decision making and organizational design. In D. S. Pugh (Ed.), organization theory (pp. 202–223). Hammondsworth, Middlesex, Eng: Penguin Books. Simon, H. (1957). Models of man. New York, NY: Wiley. Soros, G. (2000). Reflexivity in financial markets, reflexivity in history. In Open society (pp. 59–90). New York, NY, USA: Public Affairs. Williamson, O. E. (1979). Transaction cost economics: The governance of contractual relation. Journal of Law and Economics, 22, 233–261.

Chapter 9

Endogenous Monetary Transmission by Meso-Economic Model

Abstract This paper is a continuation of the recent papers by (Choudhury, ACRN J Finance Risk Perspect, Special Issue Soc Sustain Finance 6:37–52, 2017), (Choudhury, ACRN J Finance Risk Perspect, Special Issue SocSustain Finance 4:63–80, 2015), and (Choudhury and Hoque, J Econ Coop Dev 39:143–162, 2017) on the topic of endogenous nature of money (Choudhury, Money in Islam, Routledge, London, England, 1997) and monetary transmission as micro-money in Islamic financial economics. These papers have projected an Islamic economic theory of endogenous money that pursue the financing of projects in the real economy by bringing such project-specific spending to attain several much wanted goals of economic stability and performance. Among these is the 100% circulation of bank-savings that banks otherwise hold back into the liquid form of spending. A 100% Reserve Requirement Monetary System is maintained in Islamic monetary transmission and circulation with appropriate methodology and policies. Consequently, debt reduces to zero; the market transformation by the diversification of projects, the portfolio diversification of financing instruments to mobilize monetary units as micro-money into projects, and the increase in stakeholding altogether make the real output level statistically elastic. Thereby, prices stabilize in the absence of all forms of interest rates. The end result is the generalized inter-causality among the endogenous inter-variable relations.

Ontological Effect of Money and Real Economy Variables In Chap. 1 we discussed about the nature of money and its endogenous economic relations in the context of the methodical approach of Islamic economics as mesoscience. In this chapter we formalize a model and empirically test its application and implication within the theory of meso-economics in reference to the primal ontology of Tawhidi unity of knowledge in the money-real economy example of a worldsystem. Money is thereby explained as the currency circulatory value equating to Joint author, Dr. NirDukita Ratnawaty, is Lecturer in the Faculty of Economics and Postgraduate Program of Islamic Economics and Finance, Trisakti University, Jakarta, Indonesia. © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2020 M. A. Choudhury, Islamic Economics as Mesoscience, https://doi.org/10.1007/978-981-15-6054-5_9

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spending. And in the context of θ-value implying choices of spending in the good things of life and avoidance of the un-recommended ones (e.g. debt, interest ridden choices), we write the meso-economic equation of exchange as,   S(r/i, Q)[θ] = M(r/i, Q)∗ v [θ] = (p · Q)[θ] ⇒ 100% with v(θ) → 1

(9.1)

The dynamics is conveyed by the force of θ-value increasing in the monetary circulation. Conversion of bank-savings into money is circulated fully via projects-specific spending by financing instruments in the real economy. In the contrary case when project-specific spending is not fully mobilized in the θ-induced real economy then savings linger as bank-savings. Bank-savings as unmobilized financial resources are unproductive in nature. It stays in the interest of shareholders through the banking system for the functioning of interest-earning activities. It then becomes to the bank and shareholders’ interest to hold bank-savings as deposits forming liquidity. The liquidity is then not mobilized into the real economy for productive gains. Contrarily, when all financial resources are mobilized in the productive and ethically induced real economy, the financial sector and the real economic project-specific sector equate in value and nature of resource mobilization. Consequentially, Eq. (9.1) holds. In this expression, S denotes total spending. ‘r’ denotes rate of return in the real sector mobilization of savings and money circulating via financing instruments. ‘i’ denotes rate of interest. ‘r’ and ‘i’ may be in nominal or real terms. (r/i) is relative return from productive spending relative to the unproductive rate of interest. ‘Q’ denotes real output. M denotes real quantity of money as a function of the real values of Q and r/i (Cagan, 1989). ‘p’ denotes the price level. ‘v’ denotes the velocity of circulation of money. Each of these variables and thereby the functions as shown is θ-induced in the sense of ethical endogeneity by reference to the primal ontology whereby, θ ∈ (, S). The velocity of monetary transmission into the real economy is inter-causally induced by θ affecting the speed of adjustment of v(θ) → 1, as the circulation of a quantity of money in the above-mentioned relations equates with bank-savings liquidated into real-economy financing (spending) along the evolutionary learning processes of interaction and integration processes caused by unity of knowledge between all the variables of Eq. (9.1). Note also the following conditions that the spending (Sp)monetary (M)-real economy (Q) variables will hold in the corresponding wellbeing function denoted by W(Sp, M, Q, θ)[θ] = W(Q, r/i, p, v, θ)[θ] in the following equivalent systems of inter-causal relations in evaluating the wellbeing functions given in the two forms in expression (9.1) and (9.2):    ⇔ Evaluate W Q2 r/i, Evaluate W Sp2 M2 Q)[θ]  p2 v [θ]  subject to Q = g2 r/ie p2 v, θ [θ] subject to Sp = f1 (M, Q, θ)[θ] (r/j) = g2 (Q, p, v, θ)[θ] Q = f2 (Sp, M, θ)[θ] p = g3 (Q, r/i, p, v, θ)[θ] M = f3 (Sp, Q, θ)[θ] θ = F(Sp, M, Q)[θ] v = g4 (Q,r/i,p, θ)[θ] θ = G(Q,r/i,p,θ)[θ]

(9.2)

Ontological Effect of Money and Real Economy Variables

dW/dθ =

+ + + + (∂W/∂Sp)· (dSp/dθ)+ (∂W/∂M)· (dM/dθ)+

dW/dθ =

+ + + + (∂W/∂Q)· (dQ/dθ)+ (∂W/∂(r/i))· (d(r/i)/dθ)+

179

+ + (∂W/∂Q)· (dQ/dθ) > 0 identically by terms + + + + (∂W/∂p)· (dp/dθ )+ (∂W/∂v)· (dv/dθ) > 0 identically by terms The underlying implication of evolutionary learning effect in and across IIElearning processes of events spread out over History HH sustains. This foundational property is the Tawhidi ontological derivation. The signs as shown are thereby selfevident. The same result holds up for the case of the mafasid function. In the case of the mix of maslaha (wellbeing) and mafasid (harmful) these functions are disjoint. Alternatively, the variables can be arranged as ratios of each other to show the positive effects of θ-variable on the ratios like (Truth/False)-ratios as constructed variables. The circular causation relations are derived accordingly. The estimated results of circular causation between the variables in the cases of maslaha and mafasid are expected to be opposite to each other. For instance, the velocity of money circulation can be proved to be high in an exclusive financial economy1 without due regard to the possibility of the financial economy to interact and integrate with the real economy. Thus the importance of choice of activity between the financial and monetary economy to attain wellbeing by complementarities between the variables like (M, p, Q, r/i, v) is not a policy requirement. Besides, in much of existing economic literature ‘v’ is treated to be constant. That is not so in the meso-economic monetary relations of Islamic economics. ‘v’ is variable due to the dynamics conveyed by θ-effect in evolutionary learning. The role of knowledge induction in the complementary inter-variables causality by the epistemic θ-values remains benign to meso-economic performance and potentiality.

Monetary Policy by Monetary Transmission Mechanism in Meso-Economic Study The institutional structure to realize the policy simulated nature of money and real economy in Islamic perspective along with the various appertaining variables of such a relationship results in the monetary policy of financial transmission. The critical point to note here is the conception of quantity of money in relation to the central monetary authority and the private banks. In the case of Islamic ontological basis 1 Friedman

(1989).

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of θ-induction of the variables and their circular causation relations the conception of money, quantity of money, and simulated circular causation relations to attain a fitting inter-causality for establishing social and economic stability at large between the central bank and Islamic banks need to be studied. Firstly, the functions of money in the real economy with θ-effect of evolutionary learning by unity of knowledge implies that the quantity of money is simply a unit of exchange. But it has no exchange value; for there is no money market for exchange at the financial price of interest rate (riba). The quantity of money cannot be created now to meet future demand, for the intertemporal valuation of exchangeable is determined ‘nearest’ to the point of occurrence of events, E(θ), along the multi-dimensional space of History, HH. The quantity of money in the Islamic case thus does away with the idea of demand and supply of money by a price of its own exchange,2 which is the rate of interest on financial instruments that save and mobilize money incompletely into the financial economy. Now instead of the quantity of money being a function of interest rate, output, and prices, all over time, the profitability of money is determined by the return relative to the imperfect Islamic case having learnt reduction in interest rate (i) (i.e. r/i), prices (p) and output corresponding to projects that money pursues. Thus, M(θ) = M(Q, p, r/i)[θ], with dM(θ)/dθ > 0 as noted in expression (9.1). The so-called ‘equation of exchange’, Mv = p · Q, meaning the volume of money by its speed of circulation across transactions equals the macroeconomic conception of spending as the value of total output is replaced by a different meaning of the quantity of money in circulation in Islamic meso-economy. Monetary transmission in the real economy of the ontologically induced Islamic meso-economy requires endogenously embedded consciousness of a market-oriented transformation, as of projects, to heighten the absorption of money circulation. Thereby, v(θ) → 1 as θ↑ ∈ (, S). Within this transformation evolutionary learning process there lie great questions on the nature of money and money-real economy relations engaged by the central bank and the commercial banks. In the open economy the underlying dynamics of expression (9.1) involves issues of money-real economy in the Islamic world nation 2 In fact, in an ethicizing economy in the face of phasing out of interest rate and its replacement by the

rate of return with θ-deepening, complementarities between simultaneous opportunities increase and strengthen. Thereby, in the money-real economy context with, M = M(Q, r/i)[θ], dM/dθ = (∂M/∂Q) · (dQ/dθ) + (∂M/(∂r/i)) · (d(r/i)/dθ) > 0 identically by terms. The underlying complementarity between M and Q in the goods and money choices defines the wellbeing function as, W(M, Q)[θ]. For the wellbeing objective to attain the financial sector and the goods sector in the goods things of life (caused by θ-induction) are inter-linked by circular causality between M and Q. Consequently, the rates of return in Q(θ) and M(θ) are the same, ‘r(θ)’ as opposed to interest, ‘i’ in the case of monetary-financial prices earned in the financial sector not having complementary linkage between M and Q, i.e. between Savings (S) and Production (Q). Thereby, the prices of the productive sector (r) and the rate of interest of the financial sector as neoclassical substitutes of each other yield the relative price (r/i) to mark the marginal rate of substitution between the productive sector and the financial sector. This is the idea of exchange between buying and selling of M in substitution of the buying and selling of Q. Exchange is therefore linked with relative prices of goods and services that exist in substitution and thereby competition, negating the complementary relational system. The concept of exchange in any market of the endogenously inter-related causality between the good things of life is untenable.

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(ummah). A new financial architecture3 is thus born out of the ontological foundation of (, S, θ, x(θ), t(θ)) and its application. The efficacy of the money-real economy complementarities is established through the evaluation of the wellbeing function, subject to the inter-variable causality relations as explained in expression (9.1). Monetary transmission into the real economy is attained at heightened levels of effectiveness when expression (9.1) upholds. Monetary transmission in the real economy in accordance with the Tawhidi ontological premise as explained, establishes the evolutionary learning equivalence between the quantity of money and its meso-economic spending across projects under θ-impact. This is the basis of conscious choice-making in the Islamic mesoeconomy. The meso-economy learns under the embedding by θ-induction of the variables of the wellbeing function. Thereby, the meso-economy and its institutional and instrumental categories learn simultaneously in the framework of cause and effect of inter-causality. A resulting transmission mechanism is then conveyed by expression (9.3) in view of money-commodity-money relationship of resource transfer in the economy-wide sense of the aggregate effect of private sector projects4 : [(, S) → θ] → Money (θ) → x(θ) : inter-causal variables → Money(θ) → [(, S) → θnew ] → continuity

(9.3)

Expression (9.1) applies here ⇔ v(θ) → 1 as θ ↑ The quantity of money equation in the form, Mv = p · Q, Q in physical units of supply of output, results in the limiting form of ‘evolutionary convergence’ to events E(θ) along HH: M• + v• = p• + Q• with M• → p• for economic stability; v• → Q• = g, rate of growth of output. When v• → 1, g = 100%, meaning full capacity of economic growth, but only in the sense of evolutionary learning in the Tawhidi ontological sense with its epistemic implication. The conclusion then is that, progressive evaluation of the wellbeing function as in expression (9.1) sustains the stabilization of economic performance across the knowledge, space, time dimensions of E(θ) ∈ HH. There are important social implications relating to endogeneity of ontological issues linked with the economic ones of the above-mentioned relations. The fact of price stabilization with the perfectly elastic growth of the economy as a permanent phenomenon of the money, financing (spending), and real economy circular relations 3 Choudhury 4 Heilbroner

(2010). (1986).

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in respect of their endogenous inter-causal relations, means that the economic integration of this type has feedback with a life-fulfillment needs-economy and an increasingly privatizing economy. In the case of the macroeconomic general equilibrium system, this kind of adjustment is equivalent to an elastic form of non-inflationary economic growth and the complementary relations between aggregate demand with predominating spending (fiscal) stimulation and monetary policy induction.5 The project-specific expansion of monetary transmission complementing with the financing activity causes output expansion. The results then are the market dominated transformation with public sector discursive coordination. Thereby, output expands along the intersection of the resulting aggregate demand and aggregate supply curves under the impact of θ-value. Such a movement causes an elastic increase in productive employment and price-stability. In Keynesian jargon (Mankiw, 2003) the full impact of the income multiplier is realized along such non-inflationary growth paths. Finally, price-stability as a result also causes simultaneously stability in (r/i)-price relative.

Monetary Transmission Model of Islamic 100% Reserve Requirement Monetary System In Islamic real economy theory the complementary coordination of money and finance with the above-mentioned inner results in the variables causes reduction in interest rate ‘i’ even as the circulation of money, that is monetary transmission between commercial banks and the real economy with the supervisory role of central bank governance enhances productive transformation. Figure 9.1 points out the nature of money and monetary transmission between the banks and the real economy in respect of liquidating the bank-savings into spending according to the Tawhidi ontological direction. The well-known theory of Money (M)-Commodity (Q)-Money (M) model is now extended to {(M)transmission 1 -(SpQ)transmission 2 - etc.}[θ].

Monetary Transmission in the 100% Reserve Requirement Monetary System A brief explanation of monetary transmission circulating in the 100% reserve requirement monetary system is as follows. The initiation of savings is by productive activity in the national income by way of which savings S0 are deposited in the commercial banks. In the 100% reserve requirement system, the savings become deposits in banks ready to be circulated as money via financial instruments (Sp) into the real economy denoted by output of Q. Now there are three different scenarios in such a circulation of money by financial instruments into the real economy. Firstly, the full amount of savings as deposits can circulate in the real economy by financing instruments 5 Friedman

(1953).

Monetary Transmission Model of Islamic 100% Reserve Requirement Monetary System

183

Central Bank intervenon to create marginal gold stock to stabilize created stocks, L2. L3, and thereby total monetary circulaon by financial instruments in RE. Y jus, finally, v 1

(2) Mv>py [Mv – L1 = py]( )

(3) Mv py → [Mv – L1 = py](θ)). The other case is of excess demand for money with adjustment thereby with injection of loanable fund by the Central Bank of L1 . In every case, the adjusted equation of quantity theory of money and spending is restored. The result then is identical to the 100% mobilization of money into the real economy via financial instruments and banking institutions.

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9 Endogenous Monetary Transmission by Meso-Economic Model

The central bank applies a marginal quantity of gold as numeraire to stabilize the currency value of all monies in circulation, including L1 , L2 and the rest.6 The result in monetary transmission then is 100% reserve with commercial banks matching the monetary flow through financial instruments with real economy activity. This is the meaning of 100% reserve requirement monetary system. The central bank thereby ceases to have monetary governance on monetary transmission. Only marginally there exist the management of L1 and L2 , and the overseeing and guidance of the states and policies of the economy with micro-money. In such money-financereal economy interrelations the central bank establishes a discursive environment of consultation and policy guidance with commercial banks (Islamic banks), financial institutions, the real economy agencies, and all participants in economic activity.

A Focused Review of the Literature 100% reserve requirement monetary transmission of the [M,Sp,Q’][θ] type appears in the seminal works of Maritain.7 Maritain’s contribution on a nature of money recommends unlimited tokens representing money for circulation in the real economy, so that all individuals and households would benefit from these tokens by exchange of goods and services. Monetary control by the central bank, commercial banks, and other monetary authorities would disappear. In 100% reserve requirement monetary system with the gold standard as a stable numeraire the circulation of micro-money is similarly recommended to be unlimited so as to be circularly related with real exchange in goods and services. Thereby, the wellbeing effect will be optimized and asset-backing by gold would be minimal in volume. Gold would be required by the central bank only to stabilize the circulatory currency value and the residual amount of excess reserves in the central bank (Fig. 9.1). The praise for expansionary monetary supply for meeting the demand for spending in goods and services in the real economy was also proposed by the Austrian School of Economists.8 The unit of micro-money was named as Unit. It was thus the numeraire to match up with a unit value of spending in goods and services in the real economy. On the side of the wellbeing contribution of such micro-money Schumpeter’s (1961)

6 The dynamics of monetary transmission under 100% reserve requirement monetary system imply

that there is an inverse relationship between creation of gold (G) and trade (py). Thereby, gold creation comes to end as the adjustments in limiting amounts of L1 and L2 restore the 100% mobilization in (M-F-RE)[θ].We write: L1 − L2 = M = py = G. We rewrite this expression as, py/py = G/M. That is, currency value of money in circulation, py, equals G/M. Now as monetary transmission increases, M increases in quantity, G declines in volume. Thereby, G/M = a, as a declining parameter. Change in currency value, g(py) is therefore stabilized around ‘a’ the total amount of money in circulation. That is G = a * M, with G declining asymptotically, as ‘a’ and M movement establish a rectangular hyperbola. 7 Maritain (1985). 8 Yeager (1997), Hayek (1999).

A Focused Review of the Literature

185

entrepreneurial growth model is an example of micro-money being in high supply to finance sustainable microentrepreneurial projects. In recent times, it is surmised by hind sight that the monetarism of an easy rather than a counter-cyclical contraction in the quantity of money into the real economy could have stemmed the tide of the Great Depression. In a growing economy, the complementarities between fiscal (spending) and monetary policies can be best fitted for non-inflationary economic growth. In all such states of [M,Sp,Q’](θ) model within the regime of 100% reserve requirement monetary system, there remains the consistency of the effect of declining interest rates on the complementarities between money, finance, and real economy. Furthermore, the expanded release of monetary supply to endogenously support entrepreneurship, sustainability of non-inflationary economic growth, and thereby wellbeing. The early work of Friedman (1960) pointed out the possibility of such a holistic possibility of monetary arrangement. The [M,Sp,Q’][θ] model along with its early prototypes in the history of money, monetary policy, and institutional control over quantity of money for the real economy suggest that this model is consistent with the state of a productive and ethically sustainable economic regime with wellbeing as monetary and financial resources increased to complement with the real economy. Thereby a circular causation exists between the dynamics of money, finance, and real economy interrelations and the phasing out of all forms of interest rates causing release of resources for sustaining the holistic consequences of the wellbeing criterion. This yields the situation whereby a dynamic evolutionary learning by endogenous interrelations between the inner variable of [M,Sp,Q’](θ) type monetary transmission model is attained (Hayek, 1990). Firstly, we take the case of the absence of ijara-type pricing, such as rental in ijara (assets acquired by deferred payments), premiums (as of takaful), deferred payments (as of mark-up pricing by murabaha), risk and return pricing on credit sale (as in the case of twarruq, innah, istisna). There are also the many cases that are daily conjured up by so-called ‘shari’ah-compliance’ legitimation of Islamic financial instruments. All such deferred rental kinds of rates as prices on financial instruments, and thereby their pricing relations with goods and services in market exchange, are indeterminate. This problem is true at the initial point of a mutual contract, unless such prices are forward-looking prices that can be realized only ‘nearest’ to the point of exchange transactions. Forward-looking pricing is tantamount to interest rate (riba), for it remains undetermined at the present time of a contract. Thereby, real economic transactions remain equally undetermined in valuation. On the other hand, if goodwill of donations is used to form financial capital, this is not feasible under continued conditions of uncertainty and financial limitations of groups and individuals as donors for free-ridership. Feasibility and sustainability demand organized forms of pricing for risk, return, and transactions in the intertemporal sense. No formula has been derived according to shari’ah to resolve this critical outstanding problem of forward-looking ijara type pricing. There is no evidence of shari’ah instruments regarding their stability role in financing during global financial crises, as otherwise claimed. The only other way how this could happen is by relying upon

186

9 Endogenous Monetary Transmission by Meso-Economic Model

large inflow of rich shareholders’ funds. Such a case is implied in the greater than unit value of (Finance/Deposit)-ratio in shareholding of Islamic banks during the financial crises.

Twarruq as an Example of Micro-Money in Islamic Financial Mobilization One of the kinds of micro-money that has been debated by shari’ah-compliance institutional financial innovations in recent times is called twarruq. Twarruq is a shortselling financial credit arrangement. The buyer of an asset buys on credit without paying now. Upon financial need, the buyer sells the credited asset at a lower price to raise the needed funds. In the light of the Tawhidi law of unity of knowledge derived from the monotheistic origin of Islamic worldview, twarruq is both ridiculous and unlawful and inefficient mode of financing. Thereby, the use of such a fund is contrary to achieving economic stability. How and Why? The principle of relational unity between Money (M), Spending (Sp), Real Economy (Q), and thereby such sustained continuity by the [MSpQ-M …][θ] symbiotic relationship is foregone. The ijara-type pricing problem of intertemporal interest rate, as mentioned above, reappears and remains unresolved. It can be explained that twarruq causes devaluation of assets by lowering the effective prices in short-selling of assets. There also appears a smaller available financial need to meet the increasing asset transaction demand. The economy thereby comes to have two adverse effects. Lesser amounts of funds into the economy by asset devaluation cause a less productive economy with lower funds-flow into the real economy. The explanation of such marginal substitution between credited assets and their short-selling at lower price follows a neoclassical approach.9 All the tenets of [M,Sp,Q’][θ] are thus lost. The Tawhidi Law of relational unity superseding the legitimacy given to the differentiated ways of shari’ah, is violated. The shari’ah, fiqh, and fatawa (jurisprudence, opinionated religious verdicts) in all such various cases of pricing and asset valuation and dynamic resource allocation by inter-causal learning between the critical variables remain untenable.10 9A

‘marginal substitution’ form of the neoclassical production possibility curve between credited assets (superior, A) and cheaply sold same asset to raise cash (inferior, A ) can be shown along the shifting production possibility curves with resource allocation increasingly into A . The respective prices are p and p . We note the marginalist formula of ‘optimal’ resource allocation along the shifting production possibility curve caused by optimal resource allocation along the inferior asset curve, A trajectory: −((A/A )↓ = ( p  / p)↓, as. A↓ and A ↑. Thereby, ( p  / p)↓. Twarruq allocation of resources abides in this case of marginalism along the inferior goods trajectory for the credited item by the short-selling items. The (MSpQ)-circular relations in continuity are annulled. The truly Islamic epistemological inference of unity of knowledge between these variables is annulled in the cantankerous shari’ah approach. All the implications of social and economic stability arising from the wellbeing objective criterion are annulled. 10 On the contrary, the neoclassical result is negated in the precept of unity of knowledge with interactive, integrative, and evolutionary learning dynamics. Now ‘θ’ as knowledge inducing parameter

Empirical Results of Islamic Monetary Transmission Model for Bank Indonesia

187

Empirical Results of Islamic Monetary Transmission Model for Bank Indonesia A monetary transition model for the Bank of Indonesia defined as the degree of effectiveness of mobilizing depositors’ funds as bank-savings into productive transformation of the real economy has been estimated and statistical results derived. The real economy is further disaggregated for the Primary Sector, Secondary Sector, and Tertiary Sector. The variants of such a model are given below (NirDukita, 2018). In terms of the [M,Sp,Q’][θ], the Tawhidi methodological tenets of continuity in respect of the Tawhidi episteme of unity of knowledge is satisfied if there are sustained complementarities in the suggested model between their inner variables. The vector of variables would comprise socioeconomic variables, financial instruments of resource mobilization, and epistemic value parameters denoted by ‘θ’. The specific methods to evaluate the resulting statistical models of θ with their inner endogenously interactive, integrative, and evolutionary learning variables as adduced in the wellbeing function of inter-variable complementarities signifying Tawhidi episteme of monotheistic unity of knowledge are tried out. The endogenous inter-variable equations form the circular causation models signifying degrees of interactive integration attained by the force of evolutionary learning. Finally, the wellbeing function for [M,Sp,Q’][θ] for the three real economy sectors are determined. Thus all the phenomenological attributes of Tawhidi methodological worldview are activated for a critical examination of the [M,Sp,Q’][θ] model, followed by its recommendations in the monetary transmission model tested for Bank Indonesia. Description of variables (symbols) in the monetary transition model: 1.

2. 3. 4.

5.

PS (Primary Sector) denotes the total of sectoral GDPs for the following sectors—agriculture, mining, processing industry, electricity, gas and construction. Y (real GDP) is based on constant prices of 2010. PS/Y denotes the ratio of Primary Sector GDP to Real GDP (real output). SS (Secondary Sector) denotes the total of GDPs of the trade, transportation, and business services obtained by summing up the GDPs for the trade, hotel and restaurant; transport and communication; finance, real estate and business services sectors. SS/Y denotes the ratio of Secondary Sector to Real GDP (real output).

of complementarities between A and A causes both of these to increase continuously along with the increase in resource allocation by learning. Thereby, (p /p)[θ] > 0 also causes (A/A ) [θ] > 0, along the continuously increasing resource allocation with θ-induction increasing in the neighbourhood of probabilistic occurrence of complementary inter-variables relations of [M,Sp,Q’][θ]. The neoclassical results of optimal resource allocation and marginal rate of substitution (opportunity cost) are annulled in the Tawhidi dynamics of unity of knowledge along all continuums of complementary allocation of resources between the selected variables. Twarruq type allocation is dispelled from acceptance in the Tawhidi methodological worldview by the epistemological dynamics of θ-induction of complementarities in the [M,Sp,Q’][θ] circular causation relations of the wellbeing objective criterion. Thereby, economic and social stability is attained, as explained in the text.

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9 Endogenous Monetary Transmission by Meso-Economic Model

6.

TS (Tertiary Sector) denotes the total of GDPsfor services (Government and private services). 7. TS/Y denotes the ratio of Tertiary Sector to Real GDP (real output). 8. Fin/M denotes the ratio of total financing by Shari’ah banks in Indonesia to total money supply (M0 + M1). 9. SIMA denotes Interbank Mudarabah Investment. 10. SIMA/TotFindenotes the ratio of SIMA to total financing byshari’ah banking in Indonesia interpreted as portion of liquid funds in money market. 11. Theta ‘θ’ denotes the knowledge variables. ‘θ’ is obtained by determining the parametric weight of data for the variables. The weight of each of the different variables is based on an understanding of the highest rank say 10 assigned for the best data values in the light of Tawhidi methodology (Choudhury & Rahim, 2016). The formula for calculating values in each column is: θ = (10/corresponding observation value. θ = 10 for best value of the variable) * (observed variable values in the column). After getting all computations of such weights from each column variables, they are averaged across columns by rows to obtain the average ‘θ’ of all variables. It should be noted that, the way the meso-economic relevance of Islamic economic methodology is introduced in the following formulations and analysis is firstly by their primal ontological reference to the precept of unity of knowledge. Secondly, the macroeconomic model is applied to the microeconomic disaggregation into sectors. The circular causation relations estimated here contain both microeconomic and macroeconomic variables. Thus the mesoeconomic model emerges and is estimated.

Results of Data Analysis Simultaneous Ordinary Least Square (OLS) Hereinafter, the prerequisite test results presented from the entire regression model are as follows: (i)

Normality Test The results obtained from the test of the normality assumption with the Jarque– Bera normality test for transmission model data show that the error follows the normal distribution with ρ-value values of 0.378; which is greater than α = 0.01. This means that with a 99% confidence level it can be said that the error term is normally distributed. (ii) Multicollinearity Test Results of tests on the assumption of absence of multicollinearity showed that in the monetary transmission mechanism model no presence of multicolinearity is noted. This is indicated by the correlation coefficient between each independent variable in each model being smaller than 0.8.

Results of Data Analysis

189

(iii) Heteroscedasticity Test Homoscedasticity test results with white heteroscedasticity in the transmission mechanism model showed ρ value square of 0.2863, greater than α = 0.01. It can be concluded that no heteroscedasticity exists in the regression model with a 99% confidence level. (iv) Autocorrelation Test The results obtained from the tests on the assumption of the absence of autocorrelation with the Breusch-Godfrey Serial Correlation LM Test showed that the regression model contained autocorrelation. The value of ρ-value in the data of transmission model is 0.0000, which is less than α = 0.01, meaning that there is autocorrelation in the regression model. The monetary transmission model is further estimated by the VAR method to accommodate lag effect, especially by the use of VAR Granger Causality to get the next picture from the transmission mechanism path.

Vector Autoregressive (VAR) The VAR stability test is required to determine the stability of VAR estimation. The results of the VAR stability test in the following models show that a stable VAR model is shown by the modulus value, being less than one (Gujarati, 2010).

Discussion of the Monetary Transmission Model of [M,Sp,Q’](θ) The [M,Sp,Q’][θ] monetary transmission model uses an Islamic methodology approach with a view of the unity of divine knowledge. A model that is always anchored in the Tawhidi methodology based on the Quran and the sunnah. The Qur’an presents a model of development within the framework of wellbeing system with the spirit of participation; that is pairing in a process of circular causation. The strong base is circular causation in the evaluation of wellbeing (maslaha) according to the Tawhidi episteme of unity of knowledge. The relations of circular causation result in sustainability explained by simulations along the Tawhidi String Relation (TSR) up to the Hereafter. In a saying of Prophet Muhammad, it is declared that the search and discovery of the inner meaning (ta’wil) of the Qur’an and the sunnah will prevail until the end of time. The Qur’an provides a conceptual basis of analysis involving the inherent morality in economics, society, and science. In its implementation, the complementary participatory concept between the variables of each model is accommodated by including the parameter θ in each of the monetary transmission model. These are the model estimated without θ-value, and that estimated with θ-value.

190

9 Endogenous Monetary Transmission by Meso-Economic Model

The discussion of the results according to this Islamic framework follows the stages of analysis given here: 1. Using Ordinary Least Square Analysis Methods for Effectiveness Analysis, the estimation result of monetary transmission mechanism model refers to the mainstream econometric concept, which does not involve ‘θ’ as an indicator of the degree of complementarities, which symbolizes learning between the variables in the model. The [M,Sp,Q’](θ) monetary transmission mechanism model includes θ to represent the presence of the learning process of each economic agent (represented by each variable) in the model. The first evaluation method used is the simultaneous OLS method, firstly without and next by entering the ‘θ’-effect to give comparison between these two aspects of the monetary transmission models, firstly without and then with θ-value. 2. Next the Vector Auto Regressive (VAR) with Granger Causality method is used to get a transmission mechanism path. This model is a dynamic model of quantitative behavioral type.

Empirical Analysis of the Monetary Transmission Model Without ‘θ’-Parameter The estimation result of the monetary sector linkage model to the real economy by three sectors is carried out without learning parameter ‘θ’. Statistical software Eviews 9 yields the following regression estimation in natural loglinear form (LN). Primary Sector: LNPS_Y = 0.99444 − 0.08993∗ LNFIN_M − 0.00216∗ LNSIMA_FIN − 0.00017∗ RSBIS + 1.43272e − 05∗ INF t-stat: (632.8512)∗∗∗

(−28.1313)∗∗∗

(−2.9518)∗∗

(−6.4277)∗∗∗

(0.1528)

R2 = 0.924073; DW = 0.284522

(9.4)

LNFIN_M = 9.66382 − 9.65612∗ LNPS_Y − 0.03158∗ LNSIMA_FIN − 0.00129∗ RSBIS − 0.00037∗ INF t-stat:

(29.5546)∗∗∗ (−28.1313)∗∗∗

(−4.3202)∗∗

(−4.2606)∗∗∗

(−0.3791)∗∗∗

R2 = 0.916643; DW = 0.263233

(9.5)

LNSIMA_FIN = 32.38641 − 31.32116∗ LNPS_Y − 4.26216∗ LNFIN_M − 0.01621∗ RSBIS − 0.02004∗ INF t-stat:

(3.0778)∗∗∗ (−2.9518)∗∗∗

(−4.3202)∗∗

(−4.6535)∗∗∗

(−1.7992)∗

R2 = 0.390041; DW = 0.454567

(9.6)

RSBIS = 1455.45599 − 1469.08676∗ LNPS_Y − 101.54637∗ LNFIN_M − 9.42822∗ LNSIMA_FIN 0.18678∗ INF t-stat:

(6.3942)∗∗∗

(−6.4277)∗∗∗

(−4.2606)∗∗

(−4.6535)∗∗∗

(−0.6877)

R2 = 0.510917; DW = 0.335029

(9.7)

INF = −10.17250 + 13.58620∗ LNPS_Y − 3.250919∗ LNEIN_M − 1.31103∗ LNSIMA_FIN − 0.02102∗ RSBIS t-stat:

(0.1151)

(0.1528)

R2 = 0.041533; DW = 1.183478

(−0.3791)

(−1.7992)∗

(−0.6877)

(9.8)

Empirical Analysis of the Monetary Transmission Model Without ‘θ’-Parameter

191

Note ***denotes significance at 99% confidence level ** denotes significance at 95% confidence level *denotes significance at 90% confidence level No asterisk (*) denotes not significant. The coefficients of each equation show the magnitude of elasticity in relation to the endogenous dependent variable in circular causation. The above equations can be rewritten in the Cobb–Douglas form: PS_Y = 4.199Fin_M−0.0899 Sima_Fin−0.0022 rSBIS−0.0002 Inf0.00001

(9.9)

Fin_M = 15737.47PS_Y−9.6561 Sima_Fin−0.03158 rSBIS−0.0013 Inff0.0004

(9.10)

Sima_Fin = 1.15E±14 PS_Y−31.3212 Fin_M−4.2621 rSBIS−0.02 Inf0.02

(9.11)

rSBIS = PS_Y−1469.08 Fin_M−101.54 Sima_Fin−9.428 Inf−0.1867

(9.12)

INF = 3.38E±05 PS_Y13.58 Fin_M−3.251 Sima_Fin−1.311 rSBIS−0.02

(9.13)

Secondary Sector: LNSS_Y = 0.81899 + 0.23129∗ LNFIN_M + 0.00236∗ LNSIMA_FIN + 0.000366∗ RSBIS − 7.815456e − 06∗ INF (276.3376)∗∗∗ (38.3602)∗∗∗

t-stat:

(1.7053)∗

(7.0387)∗∗∗

(−0.0442)

R2 = 0.957741; DW = 0.247737

(9.14)

LNFIN_M = −3.23895 + 3.99779∗ LNSS_Y − 0.01555∗ LNSIMA_FIN − 0.00122∗ RSBIS − 0.00026∗ INF t-stat: (−33.5036)∗∗∗ (38.3602)∗∗∗

(−2.7595)∗∗∗

(−5.3563)∗∗∗

(−0.3522)

R2 = 0.952266; DW = 0.238512

(9.15)

LNSIMA_FIN = −6.93076 + 10.04756∗ LNSS_Y − 3.8376∗ LNFIN_M − 0.01488∗ RSBIS − 0.02137∗ INF (−1.4301)(1.7053)∗∗∗

t-stat:

(−2.7595)∗∗∗

(−3.9869)∗∗∗

(−1.8779)∗

R2 = 0.361234; DW = 0.435553

(9.16)

RSBIS = −669.8449 + 811.5558∗ LNSS_Y − 158.615988∗ LNFIN_M − 7.86099∗ LNSIMA_FIN − 0.1914∗ INF t-stat:

(−7.1088)∗∗∗ (7.0387)∗∗∗

(−5.3563)∗∗∗

(−3.9869)∗∗∗

(−0.7227)

R2 = 0.534652; DW = 0.347672

(9.17)

INF = 5.04529 − 2.08377∗ LNSS_Y − 3.9915∗ LNFIN_M − 1.3357∗ LNSIMA_FIN − 0.02264∗ RSBIS t-stat:

(0.1306) (−0.0442)

(−0.3522)

(−1.8779)∗

(−0.7227)

R2 = 0.41362; DW = 0.183129

(9.18)

The Cobb-Douglass form is written as: SS_Y = 2.265Fin_M0.231 Sima_Fin0.002 rSBIS0.0003 Inf−0.000007

(9.19)

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9 Endogenous Monetary Transmission by Meso-Economic Model

Fin_M = 0.0395SS_Y3.997 Sima_Fin−0.015 rSBIS−0.0012 Inf0.0003

(9.20)

Sima_Fin = 0.0009 SS_Y10.047 Fin_M−3.837 rSBIS−0.0148 Inf0.021

(9.21)

rSBIS = 1.2E−291 SS_Y881.55 Fin_M−158.615 Sima_Fin−7.860 Inf−0.191

(9.22)

INF = 155.244 SS_Y−2.083 Fin_M−3.991 Sima_Fin−1.335 rSBIS−0.0226

(9.23)

Tertiary Sector: LNTS_Y = 0.7825 + 0.0818∗ LNFIN_M + 0.0086∗ LNSIMA_FIN − 1.1412e − 05∗ RSBIS + 0.0005∗ INF t-stat: (59.6468)∗∗∗∗ (3.0629)∗∗∗

(1.4107)

(−0.0504)

(−0.5797)

R2 = 0.412828; DW = 0.085567

(9.24)

LNFIN_M = −0.2614 + 0.88700∗ LNTS_Y − 0.0831∗ LNSIMA_FIN + 0.0028∗ RSBIS − 0.0040∗ INF t-stat:

(−1.0982) (3.0629)∗∗∗

(−4.4124)∗∗∗

(3.9203)∗∗∗

(−1.5508)

R2 = 0.412828; DW = 0.085567

(9.25)

LNSIMA_FIN = −0.1725 + 1.8917∗ LNTS_Y − 1.6799∗ LNFIN_M − 0.0113∗ RSBIS − 0.0225∗ INF t-stat: (0.1604) (1.4107)

(−4.4124)∗∗∗

(−3.5495)∗∗∗

(−1.9659)∗

R2 = 0.356427; DW = 0.398679

(9.26)

RSBIS = −5.8859 − 1.8544∗ LNTS_Y + 41.2349∗ LNFIN_ M − 8.3899∗ LNSIMA_FIN − 0.2786∗ INF (3.9203)∗∗∗

t-stat: (−0.2011) (−0.0504)

(−3.5495)∗∗∗

(−0.8846)

R2 = 0.342542; DW = 0.219064

(9.27)

INF = −1.4131 + 6.0608∗ LNTS_Y − 4.9569∗ LNFIN_M − 1.3893∗ LNSIMA_FIN − 0.0233∗ RSBIS t-stat: (−0.1670) (0.5797)

(−1.5508)

(−1.9659)∗

( − 0.8846)

R2 = 0.043942; DW = 1.183592

(9.28)

The Cobb-Douglass form is: TS_Y = 2.186Fin_M0.082 Sima_Fin0.008 rSBIS−1.141e−05 Inf0.0005

(9.29)

Sima_Fin = 0.841 TS_Y1.891 Fin_M−1.679 rSBIS−0.011 Inf−0023

(9.30)

rSBlS = 0.0027TS_Y−1.854 Fin_M41.23 Sima_Fin−8.389 Inf−0.278

(9.31)

INF = 0.2434TS_Y6.06 Fin_M−4.9561 Sima_Fin−1.389 rSBIS−0.023

(9.32)

Monetary Transmission Model as Linkage Model of the Monetary Sector …

193

Monetary Transmission Model as Linkage Model of the Monetary Sector with the Three-Sector Real Economy with θ-parameterization The estimation results of the monetary sector linkage model to the sectoral domestic product processed using Eviews 9 using ‘θ’-parameterization yields the following regression equations: Primary Sector: LNPS_Y = 0.9615 − 0.0474∗ LNFIN_M − 0.0062∗ LNSIMA_FIN + 0.0004∗ RSBIS + 0.0008∗ INF + 0.0033∗ θ1 t-stat: (332.4868)∗∗∗ (−11.6095)∗∗∗

(−10.4715)∗∗∗

(8.1853)∗∗∗

(8.6713)∗∗∗ (12.2111)∗∗∗

R2 = 0.953301; DW = 0.403580

(9.33)

LNFIN_M = 11.0913 − 11.1985∗ LNPS_Y − 0.04747∗ LNSIMA_FIN + 0.00037∗ RSBIS + 0.0020∗ INF + 0.0105∗ θ1 t-stat: (12.3785)∗∗∗

(−11.6095)∗∗∗

(−4.0258)∗∗∗

(0.3614)

(1.1947)

(1.7090)∗

R2 = 0.918640; DW = 0.275288

(9.34)

LNSIMA_FIN = 73.7758 − 77.6088∗ LNPS_Y − 2.5250∗ LNFIN_M + 0.0540∗ RSBIS + 0.0809∗ INF + 0.3894∗ θ1 t-stat: (10.2359)∗∗∗

(−10.4715)∗∗∗

(−4.0258)∗∗∗

(9.7632)∗∗∗

(8.02519)∗∗∗

(13.7971)∗∗∗

R2 = 0.765370; DW = 0.418890

(9.35)

RSBIS = −768.1288 + 830.0516∗ LNPS_Y + 2.9799∗ LNFIN_M + 8.2299∗ LNSIMA_FIN − 1.3407∗ INF − 5.8088∗ θ1 t-stat: (−7.7128)∗∗∗

(8.1853)∗∗∗

(0.3614)

(9.7632)∗∗∗

(−14.3349)∗∗∗

(−32.5914)∗∗∗

(9.36)

R2 = 0.950723; DW = 0.391352

INF = −476.9551 + 510.8124∗ LNPS_Y + 5.8161∗ LNFIN_M + 4.3406∗ LNSIMA_FIN − 0.47235∗ RSBIS − 3.0083∗ θ1 t-stat: (−8.2657)∗∗∗

(8.6713)∗∗∗

(1.1947)

(8.02519)∗∗∗

(−14.3349)∗∗∗

(−16.0713)∗∗∗

R2 = 0.697690; DW = 0.788236

(9.37)

Note *** denotes significance at 99% confidence level ** denotes significance at 95% confidence level *denotes significance at 90% confidence level No asterisk (*): not significant. The Cobb-Douglass form is: PS_Y = 2.6156Fin_M−0.047 Sima_Fin−0.006 rSBlS0.0004 Inf0.0008 θ10.003

(9.38)

Fin_M = 65597.96PS_Y−11.199 Sima_Fin−0.047 rSBIS−0.0003 Inf0.002 θ0.01

(9.39)

Sima_Fin = 1.09E + 32 PS_Y−77.608 Fin_M−2.525 rSBIS−0.054 Inf0.08 θ0.389 (9.40) rSBBS = PS_Y380.052 Fin_M2.979 Sima_Fin8.229 Inf−1.341 θ−5.808

(9.41)

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9 Endogenous Monetary Transmission by Meso-Economic Model

INF = 7.29E − 208 PS_Y510.81 Fin_M5.82 Sima_Fin4.34 rSBIS−0.472 θ−3.008 (9.42) Secondary Sector: LNSS_Y = 0.8367 + 0.13657∗ LNFIN_M − 0.0075∗ LNSIMA_FIN + 0.00112∗ RSBIS + 0.0013∗ INF + 0.0057∗ θ1 t-stat: (231.7306)∗∗∗ (9.2824)∗∗∗

(−4.0491)∗∗∗

(9.4165)∗∗∗

(5.3583)∗∗∗ (6.8668)∗∗∗

R2 = 0.969734; DW = 0.238579

(9.43)

LNFIN_M = −2.4447 + 3.0751∗ LNSS_Y − 0.0357∗ LNSIMA_FIN + 0.0009∗ RSBIS + 0.0028∗ INF + 0.0132∗ θ1 t-stat: (−8.5087)∗∗∗ (9.2824)∗∗∗

(−4.0590)∗∗∗

(1.1541)

(2.2031) ∗ ∗

(2.92445)∗∗∗

R2 = 0.955467; DW = 0.283460

(9.44)

LNSIMA_FIN = 14.9043 − 16.1188∗ LNSS_Y − 3.4042∗ LNFIN_M + 0.0547∗ RSBIS + 0.0831∗ INF + 0.3988∗ θ1 t-stat:

(4.5383)∗∗∗

(−4.0491)∗∗∗

(−4.0590)∗∗∗

(10.3436)∗∗∗

(8.3636)∗∗∗ (14.5386)∗∗

R2 = 0.769916; DW = 0.447484

(9.45)

RSBIS = −330.7727 + 380.7830∗ LNSS_Y + 12.9198∗ LNFIN_M + 8.656∗ LNSIMA_FIN − 1.369∗ INF − 5.9243∗ θ1 t-stat: (−10.0512)∗∗∗

(9.4166)∗∗∗

(1.1541)

(10.3436)∗∗∗

(−14.3983)∗∗∗

(−31.3656)∗∗∗

R2 = 0.949786; DW = 0.395021

(9.46)

INF = −130.8673 + 149.5695∗ LNSS_Y + 14.153∗ LNFIN_M + 4.456∗ LNSIMA_FIN − 0.4640∗ RSBIS − 3.0351∗ θ1 t-stat:

(−5.6593)∗∗∗ (5.3583)∗∗∗

(2.2031) ∗ ∗

(8.3636)∗∗∗

(−14.3983)∗∗∗

(−16.306)∗∗∗

R2 = 0.703628; DW = 0.812723

(9.47)

The Cobb-Douglass form is, SS_Y = 2.308Fin_M0.136 Sima_Fin−0.007 rSBIS0.0011 Inf0.0013 θ10.005

(9.48)

Fin_M = 0.086SS_Y3.075 Sima_Fin−0.0357 rSBIS−0.0009 lnf0.0028 θ0.013

(9.49)

Sima_Fin = 2970676 SS_Y−16.11 Fin_M−3.404 rSBIS0.054 Inf0.083 θ0.389

(9.50)

rSBIS = 2.2E − 144SS_Y380.7 Fin_M12.91 Sima_Fin8.65 Inf−1.36 θ−5.92

(9.51)

INF = 1.4E − 57 SS_Y149.56 Fin_M14.15 Sima_Fin4.45 rSBIS−0.464 θ−3.035

(9.52)

Tertiary Sector: LNTS_Y = 0.7646 − 0.0228∗ LNFIN_M − 0.0247∗ LNSIMA_FIN + 0.0025∗ RSBIS + 0.0038∗ INF + 0.0163∗ θ1 t-stat: (186.1819)∗∗∗ (−2.5758)∗∗∗ (−11.5462)∗∗∗ R2 = 0.912237; DW = 0.404019

(24.5238)∗∗∗

(14.3573)∗∗∗

(33.5673)∗∗∗

(9.53)

LNFIN_M = 2.138 − 2.3168∗ LNTS_Y − 0.1622∗ LNSIMA_FIN + 0.0112∗ RSBIS + 0.0093∗ INF + 0.0562∗ θ1

Monetary Transmission Model as Linkage Model of the Monetary Sector … t-stat: (3.1441)∗∗∗ (−2.5758)∗∗∗

(−5.8563)∗∗∗

(4.7581)∗∗∗

(2.1588)∗∗

195 (3.7412)∗∗

R2 = 0.474624; DW = 0.096971

(9.54)

LNSIMA_IN = 16.7742 − 21.3661∗ LNTS_Y − 1.3791∗ LNFIN_M + 0.0577∗ RSBIS + 0.0824∗ INF + 0.3986∗ θ1 t-stat: (12.1860)∗∗∗ (−11.5462)∗∗∗

(−5.8563)∗∗∗

(10.9016)∗∗∗

(8.03239)∗∗∗

(14.0453)∗∗∗

R2 = 0.757849; DW = 0.380576

(9.55)

RSBIS = −251.4946 + 329.0075∗ LNTS_Y + 14.2799∗ LNFIN_M + 8.6595∗ LNSIMA_FIN − 1.3759∗ INF − 5.9434∗ θ1 (−24.2346)∗∗∗ (24.5238)∗∗∗ (4.7581)∗∗∗ (10.9016)∗∗∗ (−14.9623)∗∗∗ (−37.977)∗∗

t-stat:

(9.56)

R2 = 0.949888; DW = 0.399031

INF = −127.4214 + 168.3883∗ LNTS_Y + 4.0723∗ LNFIN_M + 4.2659∗ LNSIMA_FIN − 0.4746∗ RSBIS − 3.0061∗ θ1 (−13.8999)∗∗∗ (14.3573)∗∗∗ (2.1588)∗∗∗ (8.03239)∗∗∗ (−14.9623)∗∗∗ (−16.0924)∗∗∗

t-stat:

(9.57)

R2 = 0.698992; DW = 0.788969

The Cobb-Douglas form is: TS_Y = 2.148Fin_M−0.0228 Sima_Fin−0.024 rSBIS0.0034 Inf0.004 θ10.0163

(9.58)

Fin_M = 8.48TS_Y−2.316 Sima_Fin−0.162 rSBIS0.011 Inf0.009 θ0.056

(9.59)

Sima_Fin = 19191922TS_Y21.36 Fin_M−1.37 rSBIS0.057 Inf0.082 θ0.398

(9.60)

rSBIS = 6.6E − 110TS_Y329.00 Fin_M14.279 Sima_Fin8.659 Inf−1.375 θ−5.943 (9.61) INF = 4.59E − 56 TS_Y168.38 Fin_M4.072 Sima_Fin4.072 rSBIS−0.475 θ−3.006 (9.62)

Wellbeing Function Primary Sector: 1 = −157.4784 + 168.3749∗ LNPS_Y + 2.2742∗ LNFIN_M + 1.5803∗ LNSIMA_FIN − 0.1548∗ RSBIS − 0.2276∗ INF

t − stat : (−11.4830)∗∗∗ (12.2111)∗∗∗ R2 = 0.984777; DW = 0.422095

(1.7090)∗

(13.7971)∗∗∗

(−32.5914)∗∗∗

(−16.0713)∗∗∗

(9.63)

Secondary Sector: 2 = −43.6322 + 49.4925∗ LNSS_Y + 5.0699∗ LNFIN_M + 1.6043∗ LNSIMA_FIN − 0.1506∗ RSBIS − 0.2276∗ INF (−7.3859)∗∗∗ (6.8668)∗∗∗ (2.92445)∗∗∗ (14.5386)∗∗∗ (−31.3656)∗∗∗ (−16.306)∗∗∗

t-stat:

R2 = 0.953019; DW = 0.450415

(9.64)

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9 Endogenous Monetary Transmission by Meso-Economic Model

Tertiary Sector: 3 = −42.2396 + 55.3807∗ LNTS_Y + 1.8738∗ LNFIN_M + 1.5646∗ LNSIMA_FIN − 0.1554∗ RSBIS − 0.2279∗ INF

t-stat:

(−32.1785)∗∗∗ (33.5673)∗∗∗ (3.7412)∗∗∗

R2 = 0.972389; DW = 0.422267

(14.0453)∗∗∗

(−37.977)∗∗∗

(−16.0924)∗∗∗

(9.65)

Statistical Analysis: Results Primary Sector From the above estimation results, the rank of each endogenous variable is the value of their inter-elasticity. In the primary sector equation without ‘θ’ parameterization the magnitude of elasticity of all variables i.e. financing (M, Sp), SIMA, SBIS rate and inflation is less than one. This means that the response of primary sector change is inelastic to the change in every independent endogenous variable. Among the overall determinants of the primary sector results, financing is the largest contributor relative to the primary sector, compared to other variables that affect negatively. This is indicated by the greatest number of powers. The financing (spending) elasticity of −0.0899 means that, every 1% increase in shari’ah financing will decrease primary sector yield by 0.0899 of 1%, and vice versa, ceteris paribus. Meanwhile, the variables of monetary instrument and macro-inflation variable are inelastic and have little effect on the primary sector. The role of Islamic monetary instruments, the rate of Bank Indonesia Shari’ah Certificates (rSBIS) is negatively influenced by the primary sector variables. That is, if the primary sector declines, it will cause rSBIS to increase and vice versa, ceteris paribus. In fact, one of the objectives of Bank Indonesia intervention regulated by Law no. 3 year 2004 Article 7 with monetary instruments held is for stabilization of rupiah value, including inflation. In the event of inflation, Bank Indonesia will tend to withdraw the money supply. Meanwhile, if we look at the role of rSBIS to inflation, we find that rSBIS is inelastic to inflation. This shows that the transmission mechanism is differentiated between the monetary sector and the real sector, especially noted for the primary sector. In the estimation results in the secondary sector, the complementary results are found for transportation and trade, showing the secondary sector result is positively influenced significantly by the financing. This is in contrast to the primary sectors that are negatively affected by shari’ah financing. The role of monetary instrument, rSBIS is inelastic with a relatively small coefficient value on secondary sector outcomes. Although legally monetary instruments are intended for the purpose of stabilizing inflation, the estimates show that rSBIS does not significantly affect inflation. The strong effect of financing in the secondary sector is also shown by the value of the coefficients of secondary sector being greater than one. The significant positive effect is elastic with Islamic bank financing, while correlated negatively in the primary

Statistical Analysis: Results

197

sector. This implies that, Islamic bank financing has not been aligned to the industry as otherwise would be expected. This result indicates that there is an imbalance between the primary sector and the secondary sector. It can be caused by three financing factors in the profit orientation of the sectors: (i) murabaha; (2) short term; and (iii) high turnover. In the secondary sector however, the positive impact of shari’ah financing in the secondary sector is shown by positive and elastic influence of Interbank Mudarabah Investment (SIMA) and rSBIS. Tertiary Sector Furthermore, in the tertiary sector, the monetary instrument of rSBIS also has no significant effect on inflation. The increase in tertiary sector output is supported positively by shari’ah financing, although it is inelastic. So it can be said that, the effectiveness of shari’ah monetary instrument is relatively low. There is lack of circular causation linkage between the monetary and real sectors, even though with the monetary instruments of shari’ah.

Wellbeing Models Primary Sector The monetary transmission model for all three sectors of the real economy gives better result by accommodating ‘θ’in the circular causation equations. This is seen from the overall R2 -value being higher. The role of knowledge, the learning process of a participatory attitude implied by ‘θ’ showed more responsiveness of the endogenous dependent variables to changes in almost all the explanatory variables in every model equation. The Cobb–Douglas forms of the three-sector estimated wellbeing models result in Cobb Douglas forms: θ = log(−157.4784)PS_Y168.37 Fin_M2.27 Sima_Fin1.58 rSBIS−0.155 INF0.22 (9.66) θ = log(−43.6322)SS_Y49.49 Fin_M5.06 Sima_Fin1.604 rSBIS−0.150 INF0.227 (9.67) θ = log(−42.2396)TS_Y55.38 Fin_M1.874 Sima_Fin1.564 rSBIS−0.155 INF0.22 (9.68) In Cobb Douglas form, the sum of the variable-specific elasticity coefficients of the wellbeing function gives the indicator of economies of scale of wellbeing. This total elasticity value of each variable to wellbeing provides the measure interpreting whether economic activity is sustainable by complementarities and stable in the long run or not. Overall, the sum of the coefficients in θ-parameterized equations (estimated wellbeing functions) of all sectors shows a positive magnitude, greater than one.

198

9 Endogenous Monetary Transmission by Meso-Economic Model

Conclusion This chapter is among the first of its kind, sparing the contributions by Choudhury 11 to address the critical theme of how to stabilize the economy by the use of endogenous relationship involving abstracto-empirical methodological approach. This paper brings out the elegantly brief definition of the nature of money and the role Islamic banking institution in monetary transmission for real economy stabilization and attaining of wellbeing (maslaha). What then is money in Islam? This chapter has shown that, money identifies with the mobilization of bank-savings as deposits into spending in the good things of life and the avoidance of the socially unwanted choices. Thus the quantitative policytheoretic formulation and analysis of the [M,Sp,Q’](θ) in evaluating the wellbeing objective criterion of unity of knowledge between the inner variables of this model and their complementary interrelationships to theorize and recommend economic stability constitutes the centrally most focused objective of Islamic methodological worldview. From the empirical work in this paper we can learn about the affirmation and the corrective for change into [M,Sp,Q’](θ) based on factual case study of Bank Indonesia. Thereby, the potentiality of the [M,Sp,Q’](θ) model and its recommendations in Islamic monetary transmission from Money to Real Economy via the mobilization of Depositor bank-savings is established. This abstracto-empirical gateway towards monetary transmission within 100% reserve ratio monetary system transformation comprises the great Islamic transformation and its evolutionary learning centered Tawhidimethodological worldview.

References Cagan, P. (1989). Monetarism. In J. Eatwell, M. Milgate, & P. Newman (Eds.), Money, the New Palgrave (pp. 195–205). New York, NY: W.W. Norton. Choudhury, M. A. (1997). Money in Islam. London, England: Routledge. Choudhury, M. A. (2010). Unity of knowledge versus Kant’s heteronomy with a reference to the problem of money, finance and real economy relations in a new global financial architecture. International Journal of Social Economics, 37, 10. Choudhury, M. A. (2015). Monetary and fiscal (spending) complementarities to attain socioeconomic sustainability. ACRN Journal of Finance and Risk Perspectives, Special Issue of Social and Sustainable Finance, 4(3), 63–80. Choudhury, M. A. (2017). The future of monetary reform and the real economy: An Islamic problem of exchange versus interest. ACRN Journal of Finance and Risk Perspectives, Special Issue of Social and Sustainable Finance, 6(4), 37–52. Choudhury, M. A., & Rahim, H. A. (2016). An epistemic definition of Islamic economics. ACRN Oxford Journal of Finance and Risk Perspectives, 5(2), 106–120.

11 Choudhury

(1997, 2015, 2017), Choudhury and Hoque (2018), Choudhury, Hossain and Mohammad (2019).

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Choudhury, M. A., & Hoque, M. N. (2017). Comparative Islamic perspectives in money, monetary policy, and social wellbeing. Journal of Economic Cooperation and Development, 39(1), 143– 162. Choudhury, M. A., & Hoque, M. N. (2018). Micro-money, finance and real economy interrelationship in the framework of Islamic ontology of unity of knowledge and the world-system of social economy. International Journal of Social Economics, 45(2), 445–462. Choudhury, M. A., Pratiwi, A., Hossain, M. S., & Adenan, F. (forthcoming). In T. Azid (Ed.), A relational wellbeing (Maslaha) index of gender development in socioeconomic development sustainability. London, England: Routledge. Choudhury, M. A., Hossain, M. S., & Mohammad, M. T. (2019). Islamic finance instruments for promoting long-run investment in the light of the wellbeing criterion (Maslaha). Journal of Islamic Accounting and Business Research, 10(2), 315–339. Friedman, M. (1953). Monetary and fiscal framework for economic stability. In Essays in positive economics (pp. 133–156). Chicago, ILL: University of Chicago Press. Friedman, M. (1960). A program for monetary stability. New York, NY: Fordham University Press. Friedman, M. (1989). The quantity theory of money. In J. Eatwell, M. Milgate, & P. Newman (Eds.), New Palgrave: Money (pp. 1–40). New York, NY: W.W. Norton. Hayek, F. A. (1990, reprint). The use of knowledge in society. In M.C. Spechler (Ed.), Perspectives in economic thought (pp. 183–200). New York, NY: McGraw-Hill. Hayek, F. A. (1999). Intertemporal price equilibrium and movements in the value of money. In Good money, part one: The new world (pp. 186–227). Chicago, ILL: University of Chicago Press. Heilbroner, R. L. (1986). The ideology of capital. In The nature and logic of capitalism (Chapter 5). New York, NY: W.W. Norton. Mankiw, G. (2003). Macroeconomics (5th ed.). New York, NY: Worth Publishers. Maritain, J. (1985). A society without money. Review of Social Economy, 43, 1. Nirdukita, R. (2018).Monetary-real sector integration based on Tawhidi String Relation (TSR) methodology, on-going Ph.D. dissertation, IEF-Faculty of Economics, Trisakti University, Jakarta, Indonesia. Schumpeter, J. A. (1961). The theory of economic development. Cambridge, Mass: Harvard University Press. Yeager, L. B. (1997). The fluttering veil, essays on monetary disequilibrium. Indianapolis, IN: The Liberty Press.

Chapter 10

Money, Debt, Interest, and Real Economy

Abstract The shari’ah orientation to the problem of money and real economy and all that such a relationship upholds has failed to give money its distinctive nature and logic. Only the mainstream monetary and its financial implications were copied from prevalent ideas and theories. Thus the profound theory of money, monetary policy, debt, interest and the real economy in Islamic perspective as derived from the cardinal qur’anic ontological precept of Tawhid as law could not be in quest, search, and discovery. The consequence of such a remiss of this most substantive field of knowledge was the unquestioned acceptance of debt-bound instruments, and thereby the ambivalence of the atemporal and intertemporal meaning of interest rate (riba). Thereby, the so-called field of Islamic economics and finance and its potential contribution to a most outstanding theory and functioning of the new financial architecture remained null and void. The Tawhidi law of monetary oneness with the wellbeing objective criterion of money and real economy remained unknown in shari’ah as a human concocted mechanism. This must change completely to bestow meaning, substance, and ultimate functioning of the Tawhidi law of unity of knowledge to money and real economy interrelationship and all the wellbeing implications that the Tawhidi law upholds.

Introduction The contrast between Tawhidi and non-Tawhidi approach to Islamic economics study is manifest in the case of these two opposite ways of examining the interrelations between money, debt, interest, and the real economy. In this context the question is raised whether it is tenable to argue regarding avoidance or phasing out of interest rate and interest-based business in the presence of debt-based financing. Further still, the question is investigated whether, money and real economy complementary relationship is tenable in the presence of debt and thereby interest in its two aspects, namely, atemporal and intertemporal concepts. This chapter will argue that the proliferation of debt instruments in Islamic finance disables this field permanently by the prevalence of interest rate in its atemporal © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2020 M. A. Choudhury, Islamic Economics as Mesoscience, https://doi.org/10.1007/978-981-15-6054-5_10

201

202

10 Money, Debt, Interest, and Real Economy

and intertemporal nature. This disabling relationship further destroys several of the moral and ethical attributes of socially inclusive values that true Islamic financing ought to bear. The underlying cause of distortion in the often clamored for socially inclusive financing by Islamic financing idea and its financing instruments is the failure of so-called Islamic economics and finance as a field of study to complement money, financing, and the real economy by a cogent methodological premised understanding, approach, and modulation as is the case with the Tawhidi methodological worldviewof unity of knowledge across these variant systems with debt and consequential hidden interest rates.1

The Analytical Approach of Investigation The starting point of the criticism of Islamic debt financing in entirety of this field of money-real economy inter-causal relationship is to examine the corrupting interrelations caused by the following sub-sets of inter-causal effects. We note here the disruptive break in the Tawhidi (unity of knowledge) caused by the presence of debt and interest rate as inter-related variables of their own category whereby withdrawal of resources from mobilization takes place. The various functions f’s by their subscripts denote the circular causation recursive relations between the variables as noted. The generalized property is maintained that, continuous evolutionary learning causes continuous variations. Thereby, the product of the reverse causality of the recursive functions is not exact inverse functions of each other. Thus for example in compound function notation of •, f12 • f21 = 1, rather equals the non-zero evolutionary learning function denoted by say α(θ). Thus, (f12 • f21 )[θ] = α1 (θ) = 1. Thereby, (d/dθ)[(f12 • f21 )[θ]] = f21 · df12 /dθ + f12 · df21 /dθ = dα1 (θ)/dθ = 0. Indeed, if for generality the vectors {θ} and {θ } denote knowledge and de-knowledge, respectively, then dα1 (θ)/dθ > 0 for the choices of knowledge and de-knowledge and their spatial endowments as the respective cases would be. Yet note that, dα1 (θ)/dθ < 0, dα1 (θ )/dθ < 0. Now then the following results would hold in the case of the Tawhidi evolutionary worldview of unity of knowledge. (d/dθ}(f32 • f23 )[θ] = f32 · df23 /dθ + f23 · df32 /dθ < 0 identically because of the negative relationship between RE and D.2 Likewise, (d/dθ}(f31 • f13 )[θ] = f31 · df13 /dθ + f13 · df31 /dθ < 0 identically because of the negative relationship between M and D. That is, money in circulation and bonds held in debt are perfect substitutes. Triangles 2 and 3 explain the same kinds of results as above in terms of the inter-causal evolutionary learning relations between the variables.

1 Choudhury, 2A

Pratiwi, and Hossain (2019). prominent example is the debt-equity trade-off. See Modigliani and Miller (1958).

The Analytical Approach of Investigation

203

In Triangle 4, interest rate (i) has a positive relationship with D, and a negative relationship with the demand for money.3 In the Islamic model of 100% reserve requirement monetary system the circulation of money in the real economy is promoted through the commercial banks (Islamic banks). Thereby, the quantity of money in circulation is a negative function of the rate of interest. Thereby, debt and interest being positively complementary, the relationship between money circulation and debt is negatively related. Likewise, the correlation between ‘i’, D, RE is negative, via the positive complementarity between M and RE. The circular causal relations between the variables of the vector Z(θ) = {M/RE, M/D, M/I, RE/D, RE/i}[θ] in the wellbeing function, W(Z(θ)) are expected be to as follows: Evaluate W(M/RE, M/D, M/I, RE/D, RE/i}[θ].

(10.1)

Evaluation stands firstly for estimation in respect of results as they appear in the existing state of the inter-variable circular causation relations. Estimation is secondly carried forth by simulation of the estimated results in respect of changes of the estimated coefficients towards attaining better states of positive complementarities. This means, (M/RE)↑, (M/D)↑, (M/I)↑, (RE/D)↑, (RE/i)↑ with simultaneity in M↑, RE↑, D↓, i↓ as θ↑. In the imperfect state of Islamic transformation according to the worldview of unity of knowledge of Tawhid as law, it can be possible that D↑, i↓ but less than M↑, RE↑. Simulation of the wellbeing model subject to circular causation relations is now applicable. The circulation causation relations are, M(θ)/RE(θ) = f1 (M/D, M/I, RE/D, RE/i)[θ]

(10.2)

M(θ)/D(θ) = f2 (M/RE, M/I, RE/D, RE/i)[θ]

(10.3)

M(θ)/i(θ) = f3 (M/RE, M/D, RE/D, RE/i)[θ]

(10.4)

RE(θ)/D(θ) = f4 (M/RE, M/D, M/i, RE/i)[θ]

(10.5)

RE(θ)/i(θ) = f4 (M/RE, M/D, RE/D, M/i)[θ]

(10.6)

The final quantitative form of the wellbeing function is, v∧ = W(Z∧ (θ)), when v(θ) is a polynomial function in ‘θ’. This is simplified to a linear approx. in ‘θ’-value to the approximate quantitative form of the wellbeing function,   θ∧ = W Z∧ (θ) . 3 Tobin

(1947).

(10.7)

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10 Money, Debt, Interest, and Real Economy

The hatted variables denote the estimators of the circular causation system of Eqs. (10.2)–(10.6) in their evaluated forms. Each of the functions are preferably taken in the logarithmic form so as to readily assign the meanings of the evaluated coefficients as inter-variable elasticity coefficients and to study the returns to scale (economies of scope) in the evaluated wellbeing function of expression (10.7).

The Existing State of Islamic Financial Instruments Existing Islamic financing instruments are all debt-instruments. This means that down-payment is made on real assets at a point of time with the promise of liquidating the remaining payment of hire and purchase over time. The contractual rate of liquidating such payments is determined in terms of a contractual agreement between the buyer (investor) and seller (asset owner) based on profit and dividends from that real asset. The mode of liquidating the asset value by contractual rates of periodic payments is explained below. Debt accumulation according to ‘Islamic’ financing instruments occurs by delaying a proportionate payment in real asset holding according to a contractual formula of agreement to share risk and return. Yet the delay in the intertemporal points of payment is equivalent to a delay in the mobilizing of money into the real assets. This delay in money circulation across real assets causes bank saving. ‘Saving’ here means financial withdrawal from potential resource mobilization.4 Thereby, since interest accrual (riba) is forbidden in Islam, the ‘withdrawal’ of the monetary resources has a number of deleterious effects. The ‘withdrawal’ is an unproductive activity corresponding to money circulation across real assets. Any rate computed as return in assets during the time period of holding up monetary circulation is tantamount to riba in its intertemporal sense real asset valuation and the matching quantity of money. The above two effects are deleterious for the entire economy of inter-variable causality of the type of relations (10.2)–(10.5) and more of the kind. The above inferences imply that the circular causal interrelationship between M and RE are not meaningfully grounded in a true understanding of Islamic finance in the light of Tawhidi unity of knowledge. Thereby, the wellbeing perspective of evaluating positive complementarities between the good things of life and avoiding the unwanted ones in the light of Tawhidi principle of organic pairing does not hold up.The law of unity of knowledge between the selected variables of expression (10.1), does not characterize the true picture underlying present days’ ‘Islamic’ financial economics. The well-known ‘Islamic’ financing instruments, murabaha (mark-up), musharakah (equity), ijara (rents), bai-salam (deferred payments), istisna (manufacturing loan) are principal ones in debt-financing. Mudarabah (profit-sharing) holds a 4 Ventelou

(2005).

The Existing State of Islamic Financial Instruments Money (M), 1 f21

Real Economy (RE), 2

f31

f12

1

f23D,3

RE,2 f32

Debt (D), 3 f13

2 f13

f12

f32

205

f23

f34

3

f21 M,1 f31

Interest (i), 4

f23 f31

f14 4

f32 f43

f13D,3 M,1 f21

f41

f12RE,2 D,3 f13

f31

M,1

Fig. 10.1 Compound functional interrelations between money, real economy, debt, and interest rate according to Tawhidi worldview of unity of knowledge

En( ,z( ),t( ); H

E1( ,z( ),t( );

interacon

integraon

interacon

integraon

( )}

H

( )}

Fig. 10.2 The evolutionary learning History of events by Tawhidi unity of knowledge

marginalized bench mark position in ‘Islamic’ financing. Secondary financing instruments, sukuk (Islamic bond), bai bithman ajil (deferred payments by borrower inclusive of profits), murabaha on finance (twarruq) revolve around the primary financing instruments.5 The debt-interest problem in relation to money and real economy in Islamic analytical conceptualization occurs in each of the above-mentioned financing instruments. This continues to exist due to delaying of the interaction and integration between money and real economy by the reduction of debt and its cost of interest along the dynamic evolutionary learning perspective of inter-causality of unity of knowledge between money and real economy as good choices while reducing debt and interest as the unwanted ones. This is a technical analytical issue to contend with, which has escaped attention by the so-called ‘Islamic’ scholars.6 The missing analytical attention is of crucial importance to alert the mind, practice and text of ‘Islamic’ economics and finance into a proper direction. According to the Tawhidi law of unity of knowledge the valuation of assets assumes a continuous function of inter-relational decision making and asset evaluation. Underlying these are preferences formed by interaction and integration along continuous ensemble of events {E(θ, z(θ), t(θ); ∪interaction ∩integration ℘(θ)}. They span the historical path of evolutionary learning HH(θ). Figure 10.2 explains such valuations. The above description of the nature of existing ‘Islamic’ financial instruments that emanate from the epistemologically benign mainstream dependent area of Islamic economics and finance are really not participatory instruments that could establish inter-causal interactive, integrative, and evolutionary learning relations between 5 Usmani

(2004). (2019).

6 Shakespeare

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the diverse financial instruments. Consequently also the understanding of riskdiversification and product-diversification by means of appropriate technological change cannot be explained by the existing Islamic portfolio constrictions. Underlying such limitations is an incorrectly used ahadith according to which shari’ah scholars declare that two parallel contracts cannot be used in portfolio financing. Far from this mistake, what the Prophet meant was that until any one binding contract is completed a second and multiple ones cannot be adopted for maintaining ethical conduct in human affairs. Contrary rulings in the financial contract (uqud) in shari’ah have given rise to a cluttering of views on simple issues. Some examples of such erroneous ideas prevailing in shari’ah rulings is whether zakat should be levied on pre-tax or post-tax wealth; the shari’ah rulings to adopt debt-ridden financing instruments and thereby an amount of debt equal to one-third of investment; and the futile elan that all is permissible that shari’ah does not disband. This last ruling is a dire contradiction to logical inference.7 Consider the flawed reasoning: Shari’ah remains unopposed to its various debt-ridden financial instruments. These accumulate debt economy-wide. Would then shari’ah legitimize debt by so remaining silent on its approved debt-ridden instruments? Except for the works of Ghazali in the classical Islamic literature no other Islamic writers have invoked Tawhid as the ontological law to configure shari’ah.8 This is a gross mistake of all the Islamic sects that has caused blind subservience to exclaim shar’iah as law and jurisprudence. The function and origin of shari’ahas in the Islamic literature of all times is contrary to the Qur’anic declaration by the verse (45:18)9 7 Shari’ah scholars recommend acceptance of ‘all choices’ that the shari’ah does not explicitly forbid.

On the contrary, there are many examples of human concocted decisions following this perspective of shari’ah that do not qualify according to Tawhid as law. Yet the choices and perspectives are accepted under the shari’ah dictum. The sharees (shari’ah practitioners) say, “Whatever Allah has legislated through the shari’ah is lawful for all human beings and whatever He has prohibited is prohibited to all human beings until the Day of Resurrection.” (Al-Qaradawi, p. 34). Far from this enunciation, mathematical theory states that the complementation of the universal set,  is the null set, . Thereby, for ‘every’ set S ∈  as topology, there are complementation sets S∼ ∈ . The inference is that there are denumerable as many do’s as do-not’s in the universal scale of ‘everything’. ‘Everything’ that shari’ah is silent about has opposite complementation in reality that it does not include in its enunciation. The shari’ah judgment thus descends into an illogical statement. 8 This is the forgotten area of AAOIFI, OIC Fiqh Council, Malaysian Shari’ah Council, and the contemporary shari’ah scholars and ulemas induced by sectarian beliefs (madhabs). See also the same intellectual problem of absence of Tawhidi methodological foundation of Islamic law in Ashur (2013), Attia (2008), Auda (2008). 9 The clear explanation regarding the ultimate primal ontological beginning of Islamic law of ‘everything’ is that if ‘shariatan’ (Qur’an 45:18) is the way to Tawhid as law, then the methodology of Tawhidi unity of knowledge concerning generality and details of the world-system means the following universality of the Tawhidi law: (, S) → θ → {(World-System)[θ] ∈ (, S)} → (, S). In this Tawhidi String Relation (TSR) shari’ah as the Way is denoted by {{θ → {(World-System)[θ] ∈ (, S)}. Yet the primal ontological basis of this portion of TSR is derived from the primal Tawhidi ontology, (, S) in the beginning and tends to (, S) in the end in Akhira, te two unbounded closures of unity of knowledge (Tawhid) in ‘everything’. The Qur’an (45:18) thereby declares: “Then We put you, [O Muhammad], on an ordained way concerning the matter [of religion]; so follow it and do not follow the inclinations of those who do not know.”

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on the primal ontology of Tawhid. So why is there such undue clamour on shari’ah without the primacy and methodological foundation of Tawhid as the law?

Tawhidi Ontology of Unity of Knowledge and the Formulation of the Generalized System of Meso-Relations Involving Money, Real Economy, Debt, and Interest Basing on the previous arguments on the inadequacy of shari’ah to explain the Tawhidi methodological worldview, we now divulge the following meso-economic formulation of the generalized system relationship dealing with money, real economy, debt, and interest. The explanation engages the intricacies of Islamic relevance and reconstructionof Islamic economic reasoning according to meso-economic analysis.Mesoscience means in this entire work to be the special methodology that is ontologically sensitive to the endogenous (systemic) treatment of morality in the generalsystem study of any socio-scientific problem. Thereby, consciousness as an integrated non-physical and physical essence, that is an infusion of abstraction and application in substantively analytical formalism, and that result in the centrepiece of knowledge arising from consciousness ({θ} ∈ (, S), X(θ); ∪intersection ∩integration ℘(θ)} as inter-causal pairing between endogenous knowledge-induced variables X(θ), is the springhead of meso-socioscientific inquiry. Kaku (2015) writes in this regard10 : “Consciousness is the process of creating a model of the world using multiple feedback loops in various parameters (e.g. in temperatures, space, time, and in relation to others), in order to accomplish a goal (e.g. find mates, food, shelter).” Kaku refers to phenomenological consciousness as the ‘space–time theory of consciousness’. In our work consciousness (phenomenology) is referred to in terms of the spanning over knowledge, space, and time dimensions. How is the problem of money, real economy, debt, and interest studied in a generalized system approach with the catalytic impact of consciousness?—like as we can claim that trust in human activities is a mighty social lubricant. In the case of Islamic meso-economics, money circulation, M(r, p, C, I, X, M, Y)[θ], with r as rate of return, p as prices, Y as value of output are all taken in their project-specific sense. In meso-economic reasoning of formulating functions all endogenously related variables matter in the inter-causal relations. Thus there are inter-causal relations with the variables like, C (consumption), I (investment), X (exports), M (imports). Indeed, the quantity of money in circulation positively affects inter-variables relations as ethicized market transformation progresses under the consciously induced knowledge induction (θ). The vector of variables is thus, xM (θ) = {M, Y, C, I, X · M, r, p}[θ], which fully induced by ‘θ’ as the consciousness driven knowledge variable. It is noted that, the M(θ)-equation emerges as a 10 Kaku

(2015).

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particular circular causation equation from the Tawhidi ontological background of inter-causality between the endogenous variables of the vector in the corresponding money-related wellbeing function, say WM (xM (θ)). The meso-economic problem constructs the interactive, integrative, evolutionary (IIE) model by basing all endogenously related variables on θ-induction. The overall aggregations of microeconomic variables into macroeconomic variables, thus creating meso-economic variables are caused by θ-induced preferences, {∪interaction ∩integration ℘(θ), θ ∈ (, S)}. Evaluation of WM (xM (θ))

(10.8)

with the circular causation equation, M(θ) = fM (r, p, C, I, X, M, Y) >0

>0

>0

>0

>0

(10.9)

>0

dM/dθ = (∂M/∂Y) · (dY/dθ) + (∂M/∂r) · (dr/dθ) + (∂M/∂p) · (dp/dθ) > 0 identically.

(10.10)

Equation conveys the fact that money-real economy complementarity in Islamic meso-economics is the cause and effect (feedback) of continuous interrelations between real output, rate of return, the characterization of the change in the quantity of money in response to the prices of goods and services all taken up in the above-mentioned preference-based formation of these variables. Then there are the consumption and investment variables, which are activities in the TSR-dynamics of ethicized market transformation and are mobilized by choices of the life-fulfillment needs and by the participatory financing instruments. The variables X(θ) (export) and M(θ) denote the inter-communal economic integration in respect of establishing international participation and collaboration (ummah). All the variables in the vector, xM (θ) = {M, Y, C, I, X · M, r, p}[θ], are meso-economic variables by virtue of their underlying choice formation by preferences, menus, and participatory decision-making in the face of θ-induction and ethicized market transformation. The comprehensive meaning of ethicized money-real economy transformation ought to be understood in the context of Eqs. (10.8)–(10.10). It is the unity of knowledge conveyed by the total system of inter-variable circular causation relations that evaluate (estimate and simulate) the wellbeing function according to the Tawhidi ontology of unity of knowledge. In this regard the other circular causation equations are, the qur’an emphasis on the good uses and consequences of money in wellbeing.11 11 The Qur’an (18:19) declares: “And similarly, We awakened them that they might question one another. Said a speaker from among them, “How long have you remained [here]?” They said, “We have remained a day or part of a day.” They said, “Your Lord is most knowing of how long you remained. So send one of you with this silver coin of yours to the city and let him look to which is

Tawhidi Ontology of Unity of Knowledge …

209

Likewise, in the expenditure sector of spending as a consciously induced activity in the good things of life according to the Qur’an,12 the expected expression with the appropriate signs appears as the spending function as follows: The corresponding vector of spending related variables in the spending-related wellbeing function is xsp (θ) = {Sp, C, I, X, M, Y, r/i, p, M}[θ], where Sp(θ) denotes spending variable as endogenous variable. Other variables were defined earlier. It is the replacement of expenditure variable as exogenous Government expenditure variable, because in the discursively participative learning evolution of Islamic meso-economy there is transformation from institutional policy imposition to increasing modes of instilling consciousness by preference induction with knowledge formed by interaction, integration, and evolutionary learning. Government then transforms progressively into a participant with the growing market economy with conscious ethical induction. The resulting wellbeing and its inter-causal relations between the variables of the vector xsp (θ) = {Sp, C, I, X, M, Y, r/i, p, M}[θ] has important relationship with interest rate and debt in the context of money and real economy as earlier defined in the symbiotic sense of multivariate inter-causality. Thus we investigate the complementary influence of θ-variable as knowledge induced by consciousness of unity of knowledge of the paired (positively complementary) variables. Consider the following circular causation equations arising out of the evaluation exercise of the wellbeing function: Sp(θ) = Sp(C, I, X, M, Y, r/I, p, M)[θ]

(10.11)

M(θ) = M(C, I, X, Sp, Y, r/i, p, M)[θ]

(10.12)

These variables are all positively related. Then in respect of the definition of the quantity of money as the value of spending in the (M, Sp)[θ] sense continuously for all θ-values as ontologically premised in (, S), the inter-variable complementarities well-define the nearly perfectly equivalence of the macroeconomic IS and LM curve. The margin away from perfect elasticity of the resulting curves is due to the incompleteness of learning caused by θ-induction. The stark difference of the (Sp, M)[θ] from the IS and LM curves is dueto the meso-economic multivariate complementarities. The characterization in Fig. 10.2 of events in knowledge, space, time dimensions continuously spanning the History HH(θ) results in continuously simultaneous near perfect elasticity curves of (M, Sp)[θ] in terms of their inter-variables circular causation relations under the meso-economic pervasive effect of {θ}. Such a pervasively complementary result occurs in the mentioned dimensions, rather than simply in space–time dimension, though a passing attention is given to the inclusion of knowledge, but not to consciousness in general equilibrium study by Keunne the best of food and bring you provision from it and let him be cautious. And let no one be aware of you.” 12 Qur’an (57:11): “Who is it that would loan Allah a goodly loan so He will multiply it for him and he will have a noble reward?”.

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(1993), Romer (1994), Turnovsky (1997), Colander (2006), Stehr (2002) on knowledge, learning, and information.13 Gafford 14 has used the Schumpeterian growth dynamics to argue that technological injection at the point of full-employment level of output would extend the non-inflationary real output level but entail short-term technological adjustment cost. This agrees with our explanation that consciousness knowledge variable ‘θ’ could result on the choice of an ethically appropriate technology that could enable the complementarities between all the variables and thereby make the (M, Sp)[θ]-relationship near perfectly elastic. The dimension of knowledge emanating from consciousness induces the inter-variable complementarities with the properties of interactive, integrative, and evolutionary learning in endogeneity. The implication of the above type of transformative change in the (M, Sp)relationship intensifies the progressive reduction of debt that is presently embodied in the so-called ‘Islamic’ financial instruments. Instead, the replacement of such debtridden instruments by participatory instruments in the comprehensive definition of the real economy by pervasively expanding complementarities in the context of unity of knowledge continuously links up the flow of money into spending and pursues the feedback relationship, as in the exchange equation of quantity theory of money. Thus a continuous evolution of (M, Sp)[θ] occurs along the corresponding near-elastic paired (complemented) curves even as consciousness of unity of knowledge increases based on the Tawhidi primal ontology. The further explanation of such adjustment result is that debt ridden financial instruments a gap in redeeming payments for certain time. During this time the outstanding unpaid payment is tantamount to withdrawal for the financing institution, which in turn is liability in the accounting of potential output. Such withdrawals thereby accumulate into economy debt. The delay in redeeming the debt outstanding for a time remains unproductive if no return is calculated on it during the time-period. Or the debt would have an intertemporal cost, which is simply the rate of interest viewed intertemporally. The critical point to note in such valuation of assets is that, while for business planning purposes it is legitimate to formalize the future valuations at all points in time as potential ‘nearest points’ of valuation of assets, yet it is the actual rate of return existing in the vicinity of the ‘nearest point’ that will be accepted as the rate. Thereby, the difference between the corresponding accruals will be shared between the agents in the transactions. Yet overall, the intergenerational valuation formula will prevail. This will replace the present-valuation, internal rate of return, and absence of intertemporal futuristic formulas by atemporal ones that are presently used by Islamic banks.

13 Keunne 14 Gafford

(1993), Romer (1994), Turnovsky (1997), Colander (2006), Stehr (2002). (2009).

Monetary Policy Emanating from (M,Sp) Complementary Relationship …

211

Monetary Policy Emanating from (M, Sp) Complementary Relationship via the Circular Causation Relations The near perfect elasticity relationship between money and spending can be explained by what is referred to here as the 100% reserve requirement monetary system. The relationship is given by, Mv = p · T = p · y, with p has the aggregate price level, T as transactions meaning the number of times that a dollar of transaction changes hands in the exchange of money, goods and services. ‘y’ is the real income (output), best measured by national income. ‘v’ is the speed with which a unit of money in circulation changes hands during the exchange of goods and services; 0 ≤ v ≤ 1. But the above identity between money and spending runs into problem of inter-causality between money and prices, as it remains indeterminate which initially affects the other.15 Besides, in the moral/ethical meso-economic essential of Islamic economic treatment the important determining component of consciousness embedded via knowledge parameter of unity of knowledge is not explained in the quantity of money. Yet this factor of monetary mobilization is critical in explaining Islamic conscious transformation by the Tawhidi methodological worldview. We thereby write the corresponding money-spending interrelations by their circular causation relations arising in the problem of evaluation of the wellbeing objective criterion, as given earlier between the various variables. The same system of circular causation relations will yield prices in terms of the remaining variables. In this price-relation money and spending are coincident by their unique elasticity, and the other variables are complementary. Thus M, Sp, and p variables are replaced by the essentiality of circular causation relations in the meso-economic construct of inter-variables and inter-causal explanation of Tawhidi unity of knowledge.The circular-causation relations complementing all such variables convey the substantive meaning of the real economy and thus the money and real economy relationship with debt being reduced to near nullity. Thereby, the rate of interest in all its forms is phased out correspondingly towards zero.16 The underlying monetary arrangement is explained referred to here as the 100% Reserve Requirement Monetary System with the Gold Standard. This monetary and real economy interrelationship facilitates the wellbeing objective and circular causation relations mentioned above.

15 Laidler

(1989). analytical problem of trade versus riba is unresolved in the intertemporal context in Islamic economics and finance. Consequently the planning of pricing and sustainability of assets for economic and social futures does not have an analytical theory for economy-wide moral-material embedded valuation. Myrdal referred to this comprehensive conception of valuation as the ‘wider field of valuation’. See Myrdal (1968). The injunction of the Qur’an (2:275) overarches all vestiges of meaning of trade versus riba. Also in the intertemporal sense the Qur’an declares (3:130), “O ye who believe! Devour not usury, doubled and multiplied; but fear Allah; that ye may (really) prosper.” 16 The

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Monetary Transmission in the 100% RRMS The above schema of money flow as resource between the monetary sector and the real economy and its continuous circularity in the economic system brings out the vesting of the 100% reserve with the commercial bank. This occurs when deposits saved in the commercial banks are continuously recycled into the real economy to attain the substantive inter-causal relations between critical variables as was explained earlier. This is the ideal rule of monetary circulation under the 100% RRMS. The speed of money circulation in this regard depends upon prevailing demand for real goods and services by households, the private sector, governments, and global partners in international trade. Market process of such continuity is promoted. We refer to this kind of participatory interrelationship according to the objective criterion of evaluating the wellbeing function, subject to inter-variable circular causation in the global sense of intra-systemic and inter-systemic trading relations by M(money), Finance (Spending), Real Economy continuity of processes/Thus M-F-RE in continuum of consciousness (knowledge), projects (space), and time (t as processes). The result of the 100% RRMS is to sterilize monetary authority in the Central Bank, except as a case of exigency of meeting demand for a quantity of money and a reserve to secure an excess quantity of money as these are determined in the endogenous interrelations between the commercial banks and the real economy as substantively defined. It is to be further emphasized that the circulatory reign of money is both across material entities and the ethically inclusive entities as these are denoted by their specific variables. This returns us to the central role of consciousness as being embedded in the aggregation defined by interaction, integration, and evolutionary learning nature of preferences that span from microeconomic level to the economy-wide level. This indeed is the feature of meso-economic and mesosciencetheoretical focus on aggregation. According to this aggregation of preference dynamics there is need to include the abstracto-empirical explanatory component in

Monetary Transmission in the 100% RRMS

213

the exchange equation of quantity theory of money.17 Note that aggregation by functional compounding instead of lateral addition is because of the inter-variable evolutionary learning caused by interaction and integration between the project-specific systems. It is possible, and recommended for simplicity and specification of money-real economy interrelations for separate projects that money chases to evaluate the wellbeing functions for each of these and then functionally compound them to arrive at the joint wellbeing function. This is done as follows: In respect of the various projects denoted by i, j = 1, 2, …, n; i = j, their corresponding wellbeing objective criterion functions are, Evaluation Wi (Z(θ)), i = 1, 2, . . . , n Subject to circular causation relations between the variables of z(θ)-vector = {Sp, C, I, T, Y, r/i, p, M}[θ], T(θ) denotes net trade induced by the moral consciousness and knowledge of the good things of life while avoiding the bad things of life. Of these systems of circular causation by project specificity there is the money-equation, Mi (θ) = fMi (Sp, C, I, T, Y, r/i, p}[θ].

(10.13)

This monetary function is equivalent to the expression Mij (θ) shown in the preceding footnote. Though with the resulting quantity of money arising from inter-monetary circulation by projects being denoted by, Mi (θ), i = 1, 2, …, n. Thereby, the compounded joint wellbeing function W(θ) is given by, W(θ) = [W1 (z1 ) • W2 (z2 ) • · · · • Wn (zn )][θ].

(10.14)

17 Mv = p · T = p · Y is replaced by [Mv = p · T = p · Y][θ]. The overall induction of consciousness in the formation of knowledge having its central moral and ethical valuation meaning in paired, i.e. participatory and complementary endogenous inter-variable interrelationship reflecting unity of knowledge. This is the primal ontological worldview methodology of Tawhid and unification by organism as symbiotic oneness. We therefore write explicitly, ij Mij (θ)vij (θ) = ij pij (θ) * Yij (θ) conveying the meaning that, project specific monetary circulation by their respective velocities with the tendency of vij → 1 as θ↑; i, j = 1, 2 , …, n denoting interacting and integrating projects as evolutionary learning proceeds on. The abstracto-empirical valuation of moral/ethical elements is done by enumerating such variables as charity, trust, poverty alleviation, happiness etc. in terms of their corresponding choices of variables that enable inter-variable circular causation relations signifying organic unity of knowledge as ontologically driven by Tawhidi unity of knowledge and the generality and particularity of the world-system. In this case the world-system of study is money, real economy, and moral/ethical inclusion. On such ethical configuration of diversities of things that are invoked by moral/ethical values, the Qur’an (6:99) declares: “It is He Who sends down rain from the skies: with it We produce vegetation of all kinds: from some We produce green (crops), out of which We produce grain, heaped up (at harvest); out of the date-palm and its sheaths (or spathes) (come) clusters of dates hanging low and near: and (then there are) gardens of grapes, and olives, and pomegranates, each similar (in kind) yet different (in variety): when they begin to bear fruit, feast your eyes with the fruit and the ripeness thereof.Behold! in these things there are signs for people who believe.”

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The evaluation and quantitative form (estimation and simulation) of each of these project-specific wellbeing functions is given by its own full system of inter-variable circular causation relations. There can be many more bifurcations of the individual wellbeing functions by virtue of intra-systemic and inter-systemic organic interrelations. The result is cybernetic complexity. However, such complexity can be simplified by means of the circular causation relations and by the quantitative results of the reduced wellbeing functions and their compounding. Figure 10.4 depicts the compounding of disaggregate wellbeing functions in the simple case of {W, W1 , W2 , W11 , W12 , W21 , W22 , …}[θ]. Although obvious by its cybernetic evolutionary nature, the two-way arrows mean that such complexity explains how interactive, integrative, and evolutionary learning circular causation relations explode over the multivariate case in the topological geometry of knowledge, space, and time dimensions. Yet such complexity is simplified for evaluation by the circular causation equations of each wellbeing function. The cumulative evaluation of W(θ) can then be attained by compounding of the disaggregate wellbeing functions. By keeping in view the footnote explanation of disaggregate formulation of the exchange equation of quantity theory of money, output, and prices, the best case of money-real economy is the case 1 shown in Fig. 10.3. In such a case the Central Bank and the commercial banks do not hold fractional reserve requirements by the reserve ratio. Excess Reserve Requirement is 100% with all the deposits vested with the central bank for continuous circulation in economy at large. Since the Central Bank holds no reserve in this case there is no gold created to secure the currency Central Bank intervenon to create marginal gold stock to stabilize created stocks, L2. L3, and thereby total monetary circulaon by financial instruments in RE. Yjus, finally, v (2) Mv>py

[Mv – L1 = py]( ) (1) Mv = py, v L1, L2 = 0

(3) Mv p · y][θ]. This means immobilized quantity of money into the real economy by the commercial banks. Thereby that quantity of money, L1 , is withdrawn and placed as reserve with the Central Bank so as to avoid the possibility of fractional reserve requirement that would otherwise ensue interest regime of transactions, a situation contrary to qur’anic law. The 100% RRMS is restored at a lower level of economic activity, [Mv − L1 = p · y][θ]. But this situation is short lived as the economic and ethical activities revert to higher levels in the Islamic social economy. In the short run of time as long as L1 (θ) is held at the Central Bank for prospective material and ethical purposes (denoted by the consciousness of ‘θ’), the Central Bank creates a proportionate amount of gold to protect the currency value that remains in its custody and the amount which circulates in the state of the economy. Then as the economic recovery draws down the amount in Central Bank custody the quantity of gold required for currency stability also declines. The important inference here is that, the quantity of money required for trade in the real economy is inversely proportional to the quantity of gold produced in the Central Bank. Consequently, the seigniorage, the amount of gold produced in Central Bank, and the quantity of money held by Central Bank are inversely related to the rising volume of trade and economic activity in the absence of interest and thereby monetary liquidation of debt by money in circulation economy-wide.The amount L1 (θ) is thus finally liquidated to satisfy the demand of the real ethical economy. Case 3 requires additional quantity of money, L2 (θ), to meet the excess demand of the prosperous real economy than what the commercial banks can satisfy. The Central Bank and commercial banks share in the project-specific returns of the commercial bank activity in the real economy while the loanable fund is returned to the Central Bank by the commercial banks. The 100% RRMS is restored by the relation, [Mv + L2 = p · y][θ]].

Trade (T(θ)), Gold (G(θ)), Monetary M(θ), Spending (Sp(θ)), Interest Rate (i) and Debt (D) Interrelationships The interrelationship between the variables of x(θ) = {T, G · M · Sp, i, D}[θ] in the perspective of Islamic meso-economics is not afforded by mainstream economics. That is because, the fractional monetary system abides in the money-real economy;

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and the conception of 100%RRMS is accorded to the Central Bank instead of the commercial banking system.18 In the 100%RRMS the following relations can be explained: + + + + + −− W(θ) = W(Y, M, Sp, G, T, i, D)[θ],

(10.15)

as θ↑ ∈ (, S), and with choices of preferences, {℘ = ∪interaction ∩integration ℘ s (θ)} by the medium of interaction, integration, and evolutionary learning in the supercardinal topology of Tawhid and the world-system. Thus choices and preferences are determined by ‘s’ spanning knowledge, space, time dimensions. G denotes a quantity of gold in respect of the 100% RRMS. T denotes net trade. ‘i’ denotes interest rate in any of its forms. ‘D’ denotes debt outstanding. Each of the variables is in circulation causation with the rest of the θ-induced variables. θinduction ‘i’ and ‘D’ is inversely to these variables as these variables are positively related within them and negatively with the rest of the variables in their respective circular causation relations. Equation (10.15) yields the following relations: dM/dT > 0 as the meaning of money-real economy in the sense of its circulation in the economy at large explained by 100% RRMS. (10.16) dM/dG < 0, as a withdrawal of money in circulation from the real economy must 18 De Soto, J. H. (01/28/2019). “Mises’s proposals for a 100-percent reserve requirement”. https:// mises.org/wire/misess-proposals-100-percent-reserve-requirement. Ludwig von Mises spearheaded the proposition on 100% RRMS. De Soto points out: “According to Mises, the ideal solution would thus be to establish a system of free banking (i.e., without a central bank) subject to traditional legal principles (and hence, a 100-percent reserve requirement). In this book Mises accompanies his defense of a 100-percent reserve requirement with his objection not only to the central bank, but also to a fractional-reserve free-banking system: although such a system would greatly limit the issuance of fiduciary media, it would be inadequate to completely eliminate credit expansion nor the recurrent booms and economic recessions which inevitably come with it.” In the appendix, “Monetary reconstruction”, The Theory of Money and Credit, von Mises, trans. J. E., Bateson. Signalman Publishing, Orlando, U.S.A. 2009, writes, “The main thing is that the government should no longer be in a position to increase the quantity of money in circulation and the amount of checkbook money not fully—that is, 100 percent—covered by deposits paid in by the public.” On the contrary understanding of Central Bank operated 100% RRMS here is an explanation rendered by Mitchell, B. (Jan 12, 2010). “100-percent reserve banking and state banks”, https:// bilbo.economicoutlook.net/blog/?p=7299: “a 100-percent reserve banking system would allow the government to control the money supply and hence maintain price stability. This is because all money would be created by the national government in this system. Banks would not be able to create deposits by extending loans.” These observations are similar to the one we are presenting but having no concern regarding ethical contribution that money circulation makes to the social economy. To circumvent this missing gap we included the substantive epistemological relevance of organic unity of knowledge emanating from Tawhidi primal ontology.

Trade (T(θ)), Gold (G(θ)), Monetary M(θ), Spending (Sp(θ)) …

217

be held with the Central Bank. The Central Bank in turn creates a volume of gold to stabilize the value of money so held and also that which is circulated residually. (10.17) dG/dT < 0; for the reasons of(10.16) and (10.17).

(10.18)

dG/dY < 0; for the reasons as above.

(10.19)

dS/dD > 0, with ‘S’ denoting savings.

(10.20)

This relation is due to the withdrawal effect that ‘D’ has on equity formation; and ‘S’ has on withdrawal from the money-real economy relationship of 100% RRMS. dS/di > 0, by the positive relationship between ‘i’ and ‘D’.

(10.21)

dS/dY < 0. Keynes always thought of savings as having negative effect in the income multiplier contrary to the positive effect of injections into the economic activity.19 dM/dD < 0

(10.22)

due to the withdrawal effect of D on equity formation by the circulation of money in the money-real economy relationship of 100% RRMS.20 dT/dD < 0 by similar argument.

(10.23)

dT/di < 0 by similar argument.

(10.24)

dG/dD > 0 as D being contrary to equity formation in the money-real economy and G being positively related to withdrawal of immobilized financial resources by the Central Bank. (10.25) dG/di > 0, as less productive resource is mobilized in the real economy. Thereby, if ‘i’ were exist as in the case of dual monetary system, there would be tendency toward bank saving. (10.26) dS/dG > 0, as bank saving being potential withdrawal from the money-real economy is resource available with the Central Bank. 19 Ventelou

(2005). and Miller (1958).

20 Modigliani

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This amount of Central Bank deposit must be protected by an amount of G created in the Central Bank and paid for by seigniorage.

(10.27)

dY/dG < 0 for similar reason in the money-real economy with 100% RRMS. (10.28) dS/dT < 0 for similar reason as above.

(10.29)

dS/dM < 0, dS/dY < 0 for reasons of negative relationship between bank saving as withdrawal from monetary circulation in the real economy and thereby its contribution to economic activity. (10.30)

Stability of Exchange Rate of Currency in Circulation in 100% RRMS From the above discussion of the multivariate interrelationship of a quantity of gold created by the Central Bank, commercial bank, and real economy relationship we can now answer the question: How is the value of currency in circulation stabilized by a decreasing amount of gold as the real economy and commercial bank relationship intensifies? We note that, in respect of attaining stability of the inter-causal variables of the wellbeing function, the determination of exchange rate stability is an endogenous productive consequence. We prove it as follows: Consider the money function, M = M(Y, G, e)[θ]. We derive the following relation: because of the above-mentioned money relation.