WEALTH AND KNOWLEDGE
Abstract
A
contrasting idea of wealth both within mainstream economic reasoning and with
respect to the Islamic idea of production, ownership and distribution of wealth
is expounded. In the latter case a substantive explanation of a worldview that
is epistemologically premised on unity of knowledge establishes the foundation
of a methodology that can be singularly found in the Islamic case of wealth and
its functions alone. Economic ideas along with rules derived from Qur'an and Prophetic guidance (Sunnah) in the Islamic case leads the
paper to some formalization on the structure of a general ethico-economic
general equilibrium and the related method of asset-valuation.
The objective of this paper
is first to introduce the concept of wealth in comparative perspectives with
the emphasis being on its Islamic meaning, mode of production, ownership and
distribution of wealth. In this way, as we explain these issues a substantive
meaning of knowledge will emerge premised on the epistemology of Unity of God (Tawhid). This precept is found to play a
singularly central role in human affairs, and thus in the issues relating to
wealth.
The meaning of wealth as understood in mainstream economics
In mainstream meaning of the
term, wealth is understood as the accumulation of assets from which accrues a
perpetual flow of income. Some of these items can enable a continuously earning
power that goes into the production of goods and services, which then can
acquire increasingly cumulative value. We will argue against mainstream
economics that a substantive meaning of wealth cannot per se accept things like
income, money, savings, property and depreciable goods, such as cars and rich
clothes as wealth by themselves. Contrarily, we will argue that an item such as
income becomes wealth when acquired by productive activity and spent in
acquiring productive things. Other items mentioned above must also fall in this
same category of a productive medium to qualify as wealth.
Is money wealth?
We will argue that money by
itself is not an item of wealth. Indeed the idea of money as wealth was
discarded in classical economic theory. Adam Smith rejected this idea of wealth
as bullions that was held by mercantilism. Much earlier, Ibn Khaldun rejected
the idea of money as wealth in view of his original contribution of the concept
of productive division of labour. He considered artisans as producers of useful
things. Merchants were considered as idle economic agents in the formation of
national wealth (.). Earlier still, Aristotle thought of wealth generated by
profits as socially abhorring (Barker, ). The Physiocrats who preceded the
classical economic school in occidental history thought of agriculture as the
only basis of productive wealth. They thought that the net produit of the nation depended on agricultural activity. Work
associated with agricultural activity was seen as the only productive labour
(Schumpeter, ).
These early economic thought
saw in the use of money its purpose of generating productive activities, such
as agriculture and the non-depreciable goods and services in an economy. This
perspective assigns the meaning of wealth to such assets, which when valued in
terms of money, gave the assets a money value. The term, 'wealth', thus meant
both its formation through productive real goods and services as well as the
money value of such productive activities.
Is saving wealth?
savings done by individuals,
businesses, institutions and government
in banks cannot constitute wealth. The return on savings and hence the
incentive to save is based indispensably on interest rates. Furthermore, if
savings are gambled away to finance speculative assets, the rate of interest
increases in the face of a risky financial environment that breeds on
speculation. High interest rates as measure of risky-pricing cause a withdrawal
of income, money and investment away from prospectively new projects by
diverting funds instead into bank savings. Savings thus become a withdrawal
from real economic activity. The longer is the period of savings held in liquid
form and not 'mobilized' in productive investments the higher is the rate of
interest. This waiting time to produce capital in time is known as the
round-aboutness of production, the cost of which is the rate of interest (von
Bawerk, ).
In this way, in the presence
of interest rate, which is the principal payment for savings, accumulation of
money as savings results in a dual economy. That is, the financial sector and
the real economic sector compete with each other in substituting savings for
real productive goods and services. Increasing rates of interest give impetus
to such a deepening economic duality.
Is social artifact wealth?
Next we consider social
artifacts such as expensive cars, homes and property held by a few as a show of
wealth. Do these artifacts really convey a meaning of wealth? To answer this
question we must simultaneously inquire whether social artifacts are
necessarily linked with wealth, its absolute ownership and distribution through
productive channels?
To understand these kinds of
causality one notes that the rich things of life being unaffordable by the
majority do not enter economic circulation, which in turn generates the
national product. For instance, the cost of a million dollars worth of expensive
paintings will not be accounted for as a significant addition in the growth of
real national product. Likewise, a multi-million dollars divorce settlement of
a movie star will not be accounted as an addition to the national product.
Gambling is yet another activity that does not add to the national product for
Government's taxation of windfalls made by casinos over the losses of gamblers.
Likewise, expensive cars are depreciable and non-circulatory goods in the
economy, they being owned by a few who can afford them. Thus their value does
not enter the cycle of goods and services that circulate in the economy. Hence
such artifacts do not contribute to the gross national product. In each of the
above kinds of expensive and rich social artifacts the net worth of incomes
remains the same, only money changes hands within a closed circuit --
production by and for a leisured class (Veblen, ).
On a dynamic sense, one can
think of the case when earned income increases to make a once expensive
artifact affordable for the common income earner now. This however is a
relative picture, in which the productive activity of the economy and not the
closed circuit as mentioned above, plays the role in income generation. This in
turn increases the common man's accessibility to previous categories of wants
(Levine, ). But, even in such a state of economic change, expensive goods
merely reach a higher vintage to satisfy the ego of the rich. The cycle of the
closed circuit of leisured wants remains structurally unchanged.
Observation on the essential nature of wealth
Rich artifacts thereby, do
not produce wealth. In every case that we examined above, the structure of
relationship between the generation of gross national product and productive
activity remains linked simply to earned incomes and productive spending rather
than to expensive artifacts. As earned income increases, the relative values of
baskets of goods and services change over time, but the economic circuit of
expensive artifacts remains structurally closed and limited with regards to
allocation and circulation of productive resources. This is the same as saying
that a dollar received by the poor is worth more than the same dollar received
by the rich. The poor uses the dollar in productive activity around essential
needs satisfaction. This generates enterprise and needs (Levine, ). Contrarily,
the demand for needs being satiated for the rich, a dollar received by the rich
is put into expensive social artifacts as economic wants.
What makes economic goods
expensive and hence non-affordable is their inelastic supply. Since rich social
artifacts due to their closed circuit can be seen as monopoly good demanded for
catching up with conspicuous consumption, their prices increase along the
inelastic supply curve of such monopoly goods as rents. Increased demand for
such goods fuels overall price increases. The result then is inflationary
pressure fuelled by conspicuous consumption. With a consequent decline in real
income, the real sector activity contracts in the face of inflation and
constrained spending. Productive wealth of the nation declines.
Production and ownership of wealth
Wealth is formed by the
mobilization of resource by individuals, businesses, institutions and nations,
not by holding back such resources in the form of savings driven by the lure of
earning interest. To generate wealth through productive activity, the financial
sector and the real sector of the economy cannot be in conflict with each
other. Only when a competing dichotomy exists between the two sectors that we
find the concurrent contradictions. High interest rates obstruct investments.
Speculation and promissory notes cause high risk. Consequently, unproductive
economic and social activities abound. Contrarily, resource mobilization and
not savings generates returns out of real economic activities in social ends.
Thus the cycle of producing wealth through productive economic activity and its
social perspectives get interconnected.
On recapitulating, we note
that the true meaning of wealth is based on the monetary and physical value of
assets that are actively formed through real economic transactions. Wealth is
formed by means of productive activity and not by holding of money in the form
of savings as withdrawal. Thereby, for wealth to be formed in the nation as a
whole, the ownership of assets must lie with the ability of common income
earners through enterprise. Since common income earners depend upon a greater
share of basic needs of life in their demand schedule, therefore, the social
meaning of production and ownership of wealth implies a focus on basic-needs
regimes of development and not on the utilitarianism of rich and expensive
artifacts.
Distribution of wealth
The social aspect of wealth
is thus linked with the productive nature of spending and not with the existing
stock of money, savings or conspicuous consumption. The distribution of wealth
can then be seen as a social consequence of its meaning, production and
ownership within the context of circulatory flow of goods and services. This
implication leads us to examine the distributive nature of wealth as sharing on
a social basis through the production and ownership of wealth by virtue of
productive and socially acceptable spending cycles.
Because interest rate and savings are linked to
withdrawal of resources over time and the cause and effect of speculatively
risky ventures, therefore, neither production nor ownership of wealth in its
social sense is made possible under such conditions. Consequently, distribution
of wealth is impeded through the obstruction caused on the productive and
ownership sides. We will now examine these questions further.
Savings, interest and concepts of wealth
The concepts of wealth, its
production, ownership and distribution in the social sense as given above are
not necessarily in consonance with the same ideas of wealth in interest-bearing
economic transactions.
According to an
interest-bearing regime of economic activity savings are formed by interest
earned and accumulated. Accumulated value of savings is then turned into
investment as a supply of needed funds. But there is a contradiction here.
Savings remain attractive under two incentives, high rates of interest and a
length of time for holding it in liquid form, given income level. The volume of
savings is directly related to these two factors. Both of these factors
positively affecting savings are contrary to useful spending. Hence there
occurs an antithesis to investment, and thereby, to the generation of gross
national product. The latter are generated through productive activity and not
by savings as time-related interest-bearing resource withdrawal from real
economic transactions.
Contrarily, if savings as
resources are continuously mobilized into productive and socially appropriate
investments, then there cannot exist the holding incentive. Now interest rate
becomes logically unwanted in such a case of resource allocation. All that
matters is the allocation of resources into useful spending outlets. Such
categories of spending include consumption, investment and government
expenditure and the expansion of trade. Consequently, the goal of attaining
social well-being and production of wealth is realized in relation to an
expanding accessibility to useful ends.
Historically, the
economically most depressive times are found to be associated with high levels
of savings. This case happened in the face of a contraction of money supply
during depressive times, when otherwise it would have been necessary to finance
the spending levels of an ailing economy. Both of these cases happened during
the Great Depression (Bordo, ).
In modern times, the
speculative fervour of savers is well known to have caused capital-market
turmoil all around the world. The cost of protecting national governments from
such recurrent debacles in recent times has resulted in high taxes for building
up Government exigency funds. Besides, interest rates and price levels have
simultaneously remained high in all adversely affected economies.
Indeed, the financial sector
grew in its size with a large amount of savings as speculation capital took
hold over herding behaviour in currency swaps, hedge funds and E-commerce
gimmicks. Thereby, the wealth of the affected nations declined in the face of
high interest rates, speculation capital, herding behaviour among savers, high
tax rates and inflationary pressure. All this happened despite the existence of
high levels of savings with speculative finances.
Each of the activities
mentioned above is found to depend critically on the movements of interest
rates and savings. Economically regressive consequences of interest rates and
savings in speculative funds thereby, do not reflect the mainstream argument
that wealth is formed by making the real economic sector and the financial
sector compete with each other. Withdrawing funds from the former to the latter
due to the interest and saving lure is both a socially and economically unwise
strategy.
Does savings contribute to capital accumulation for economic growth?
We note that mainstream
economic arguments legitimize savings as the basis of capital accumulation. The
argument made is that savings would lead in turn to spending and consumption,
and thereby, generate economic growth over time. This is a misleading economic
argument with grave social consequences.
Economic growth is measured
by the increase in the real value of national income over time. In this
macroeconomic picture, it matters little how capital accumulation takes place.
Capital stock can increase with speculative finances, giving the impression that
transactions in the financial sector are booming. Financial valuation is then
recorded in the balance sheets of businesses. It is then entered into the
national balance sheet. Yet the same
funds that record an increase in the level of economic activity get adversely
affected by flight of capital in the face of speculative portfolio investment.
Thereby, interest rates increase in the face of the speculative risk. The
flight of capital combined by interest rate hikes are followed by scarcity of
funds for financing real economic activity, even though there is a flair for
savings now.
In the external sector,
export-orientation of the nation declines and import- dependence increases,
causing debts and external sector imbalances as well as creeping inflation. Development
sustainability is lost in the name of short-term notion of economic growth
caused by the temporary sign of a fattening financial sector conflicting with
real sector activity.
One notes that behind the
capital-market turbulence in Asian economies, Mexico, Brazil and Russia in
recent times, was this uncertainty of sustained growth as the economies grew
disproportionately under the force of speculative funds. The real economy found
itself deprived of financial support as speculative capital started to fly out
of these regions. Governments became bewildered by their currency runoff.
Interest rate had to be increased. This halted real economic activity.
Employment and incomes remained impoverished. Debts and the associated
transparency problems of non-performing loans compounded the situation (IMF
Annual Report, 1998, 1999).
Economic and social ills
thus joined hands to reduce the wealth of developing nations when they
continued to base their agenda of economic growth on the savings doctrine of
capital accumulation. The concept of resource mobilization brought about by
generating linkages between the real and the financial sector remained unknown
in their development plans and programs. Today, following the global financial
turmoil, a new theory of financial-real economy complementarity can provide a
potentially new and safe way of reconstructing the global financial and
monetary architecture (IMF, ).
Islam on wealth: lessons from the Qur'an
and Sunnah
The greed for wealth
produced by the acquisitive passion to accumulate out of idle savings is
condemned in the Qur'an and Sunnah (Guidance of Prophet Muhammad) on
both of the following grounds. The acquisition of wealth reduces the due share
and well-being of everyone and diminishes the distributive spirit as a sign of
human solidarity. It heightens the dominance of the unduly wealthy over the
weak in the means of production, ownership and distribution of national wealth.
These together make the unduly wealthy forget the moral and ethical duties of
individual and social harmony that God has bestowed on man. The Qur'an says not to create mischief in
the world once it has been placed in order. Furthermore the Qur'an warns, "Who has gathered
wealth and counted it, he thinks that his wealth will make him last forever!
Nay! Verily, he will be thrown into the Crushing Fire."(CIV:2-4).
On grounds of exegesis of the above verses, we note that
the Qur'an is presenting here a
worldview that emanates from the primordial truth of Divine Unity. It then
reflects this principle of unity of knowledge on to the experiential order.
Between the primal origin of creation, the worldly and the Hereafter exist
causal interrelationships. Such an epistemological understanding and the
application of the precept of unity of knowledge as derived from Divine Unity,
establishes the praxis for reconstruction of the Islamic socio-scientific
order. The meaning of the above verses is taken up in the light of this ethical
general equilibrium system of a relational universe. The meaning of 'Crushing
Fire' can now be made to imply the high uncertainty, deprivation, social
inequity and dominance that come about in the midst of acquisition of wealth by
undue means. These are facts that have been overly proven in recent times by
the uncertainty caused by global capitalism. But the same meaning also
implicates the ultimate punishment for the evil arising from undue acquisition
and use of wealth.
Meanings of due and undue wealth
What then is the idea of
undue as against due wealth according to Qur'an?
On 'due means' of acquiring wealth, the Qur'an
says, "…so eat and drink of the sustenance provided by God, and do no evil
nor mischief on the (face of the) earth."(II:60). The Qur'an carries on: "O Children of Adam! Wear your beautiful
apparel at every time and place of prayer: eat and drink but waste not by
excess, for God loves not the wasters. Say: Who has forbidden the beautiful (gifts) of God, which he has produced for
His servants, and the things, clean and pure, (which He has provided) for
sustenance? Say: They are, in the life
of this world, for those who believe, (and) purely for them on the Day
of Judgment. Thus do We explain the Signs in detail for those who
understand."(VII:31-32). Due wealth is thus honestly earned out of effort
in accordance with socially acceptable ways and means.
Undue wealth is wealth
acquired by the grievous spirit of acquisition and waste for satisfying
egoistic ends. Consequently, there comes about demise in sharing of the
production, ownership and distribution of wealth.
Even the spending by the
unduly wealthy does not lead to social and economic well-being. As we have
explained earlier, a gambling economy for instance, adds nothing to the
productive generation of wealth that could generate earned income and thus
bring about factor utilization, sharing and spending on a common scale. The Qur'an says, "What they spend in
the life of this (material) world may be likened to a Wind which brings a
nipping frost: It strikes and destroys the harvest of men who wronged their own
souls: it is not God that has wronged them, but they wronged
themselves."(III:117).
Thus the differentiation
between due and undue wealth is made clear in the Qur'an in terms of the social nature of wealth on the one hand, and
the acquisitive passion to accumulate it for selfish goals on the other. The
latter in turn is pronounced to be based on the function of interest or any
kind of undue excess. They cause wasteful consumption and production and undue
spending on such unwanted social artifacts.
On the matter of
accumulation and hoarding of wealth by means of interest, the Qur'an says that this is contrary to the
moral capability bestowed by God on man to be equitable, prosperous and to
share in the sustainable well-being of life-fulfilling possibilities. The Qur'an differentiates interest
transactions from real transactions, thus making the real worth of money depend
not on a money value of time or in terms of its price of lending and borrowing,
which is the rate of interest. Rather, the true worth of money is to be
reflected on the market transactional value of real goods, which in turn are
valued by money (Choudhury, 1997).
Real transactions versus interest-based transactions
On matters of
differentiation between interest transactions and real transactions and between
spending as a social aspect of life and hoarding as undue end, the Qur'an says, "Those who devour
usury will not stand except as stands one whom the Evil One by his touch has
driven to madness. That is because they say: 'Trade is like usury,' but God has
permitted trade and forbidden usury…… God will deprive usury of all blessing,
and will give increase for deeds of charity: For He loves not creatures
ungrateful and wicked."(II:275-76).
The idea of charity in the
above verse is meant to be an act associated with income multipliers generated
by the circulatory power of wealth, money and real transactions. All these must
take place through the medium of spending in socially recommendable outlets.
The power of income multiplier is determined by heightened complementarity,
that is linkages, participation and the capability of discovering
ever-increasing diverse possibilities in the real economy. The real sector is
simultaneously taken up in
complementing relationship with the financial sector.1 The Qur'an says regarding the multiplier
function of knowledge on wealth: "Who is he that will loan to God a
beautiful loan, which God will double unto his credit and multiply many times?
It is God that gives (you) want or plenty, and to Him shall be your
return."(II:245). The result of charity is always advanced by multipliers
in the sense of earnest means of acquiring and spending wealth through socially
recommendable ways.
The above differentiation
between due and undue wealth is further brought out by means of transforming
human preferences by knowledge-induced consciousness. That is, without such
consciousness, the absence of ethical conduct in determining the true purpose
of material artifacts can turn some due things into undue things and vice
versa. The transformation of due things into undue things can occur from their
waste and selfishness. The Qur'an
says in this regard, "Wealth and sons are allurements of the life of this
world: But the things that endure, good deeds, are best in the sight of your
Lord, as rewards, and best as (the foundation for) hopes."(XVIII:46).
The sayings of the Prophet
Muhammad with regards to wealth and its purpose are also to be noted. Narrated
'Abda: The Prophet said, "Do not withhold your money by counting and
hoarding it being afraid that it may be exhausted lest, God should withhold His
blessings from you."(Sahih Al-Bukhari, Vol. 2, Hadith No. 514).
Narrated Aisha, the wife of
the Prophet Muhammad: The Prophet said, "If a woman gives in charity from her house meals without wasting (i.e.
not being extravagant), she will get
the reward for her giving, and her husband will also get the reward for his
earning and the storekeeper will also get a similar reward. The acquisition of
the reward of none of them will reduce the reward of the others." (Sahih
Al-Bukhari, Vol. 3, Hadith No. 279). In these sayings of the Prophet Muhammad
one again notes the increasing multipliers caused by the blessing of sharing
and contentment within a socially meaningful general equilibrium order. In
recent times studies on social trust (Arrow, ), the grants economy (Boulding, )
and gifts and exchanges (Arrow, ) confirm the fact of increasing social welfare
effects of such resource allocation.
The dynamic effect of charity on wealth in
Islam
Let us understand the
dynamically increasing nature of income multiplier that leads to the production
of wealth according to Islamic tenets. The morally constructive elements of
wealth in Islam were noted earlier. They are first productive spending in trade
and real economic activity of the recommended type, rather than in hoarding and
withdrawal by the medium of savings that pursue interest rates. Secondly, real
economic activity calls forth the existence of extensively relational
complementarity both between the financial sector, money and the real sector as
well as within these sectors. Thirdly, there is the overarching impact of the
charitable spirit carrying with it Divine blessings. It means an orderly
function of social and economic systems realized by means of the principles and
tenets that make blessing enter human transactions and be so regenerated. The
Islamic institution of perpetual charity (waqf)
testifies to the social and economic roles of sustained charity for human
well-being (Sadeq, ).
The multiplication of
blessings and rewards attained both in this life and the Hereafter as the
above-mentioned Qur'anic verses and
sayings of the Prophet point out, is due to the integral interrelationship
between material experience and the Islamic Law (Shari'ah). The latter is formed by the epistemology of unity of
knowledge, which in turn is the embodiment of both Hereafter and the primordial
beginning of creation. By such an overarching element of dynamic
interrelationships in the Islamic world-system, knowledge becomes the primal
premise of all explanation and action. Knowledge appears here in two forms.
First there is the primal premise of Divine Unity as unity of knowledge in the
Islamic world-system. This primal premise of knowledge can also be referred to
as the Stock, as it is the domain of perfect and absolute knowledge that is of
God's alone as the Creator, Cherisher and Sustainer of the universes and all
that is in between them.
From the Stock emanate the
worldly knowledge-flows. Knowledge-flows carry with them the tenets, sensations
and organizational capacity of unification of knowledge in world-systems. When
derived in a regimented way from the primordial epistemology of Divine Unity,
knowledge-flows are characterized by three permanent attributes that realize
the epistemic nature of unification of knowledge in all and every world-system
(Choudhury, 1995). We will examine this methodological orientation of
knowledge-flows in relation to the epistemic foundation of unity of knowledge.
Contrasting Islamic economic and social injunctions with mainstream
rules
Mainstream economist has forgotten
to include articles of human sympathy ever since the times of Adam Smith's (.) The Theory of Moral Sentiments,
Walras's concept of social economy with moral values (.), the Austrian School's
denial of the appropriateness of interest rates in capital accumulation (von
Mises, ; von-Bawerk, ), of Tawney's (.) Acquisitive
Society, Veblen's (.) concept of conspicuous consumption in his The Leisure Class, and Keynes' ethical
epistemology taking from Moore's Ethica
(.). In his Essay's on Persuasion
Keynes (.) wrote forcefully against the greed of money that defeats the purpose
of civil living: …………………………………………………………………
The knowledge
model: interactive, integrative and evolutionary methodology of Qur'anic
world-system
First, there are
interactions among agents, systems, systemic variables and their relations as
these are humanly observed and understood in space and time in the light of the
epistemology of Unity of Knowledge. Interactions signify the freedom required
in deriving rules from Qur'an and Sunnah and understanding them in the
perspectives of ever-changing human situations in space and time. Interactions
understood in the extensive sense mean perpetual learning through observation,
comprehension and analysis of problems and issues in the human and non-human
worlds.
From interactions emanate
the second category of the knowledge-centered world-system, namely integration.
Integration shows up as complementarity across diversities of possibilities
that are generated by interactions. Hence by the combination of systemic
complementarity across diversity we come up with the 'principle of
complementarity across diversity'. In other words, there comes about a
sequencing of interactions as learning organisms that generate knowledge-flows.
The character of such knowledge-flows is of the essence of their episteme of
unity of knowledge. Hence knowledge-flows establish the process of unification
of knowledge in world-systems. In the economic, social and institutional
domains, the interactive-integrative methodology is depicted by the existence
of consensus (integration) arising out of discourse (interactions). In the
non-human world-systems, but with which comprehension, observation and analysis
are made to interact, the interactive-integrative methodology results in a
process-oriented worldview leading to complex orders with dynamic
equilibria.
Thus thirdly, from the
interactions leading to integration of knowledge arise fresh search and
discovery of newer sensations of knowledge. The interactive-integrative process
of unification of knowledge is continued through such evolutionary sequencing
of new knowledge-induced orders. At the end of interactions leading to
integration of knowledge arises the evolution of knowledge to newer
process-oriented realization of unification of knowledge. We now have the
IIE-worldview of unity of knowledge. Each sequence of such an IIE-process
always references its fundamental epistemology of Divine Unity (Tawhid) and the guidance of the Prophet
Muhammad (Sunnah). Without these two
combined and immutable roots the ordered complexity of unification of knowledge
cannot be sustained. Taking out these fundamental premises from the process of
unification of knowledge in world-systems would lead to chaotic complexity
known to result from rationalism. Methodology premised on such chaotic complex
learning have been pronounced by Popper (.), Darwin (.), Priogine (.) and by
Wallerstein (.) regarding his capitalistic world-system theory. They are
different from the unified complex orders of IIE-world-system.
Continuity of the processes
of interactions, integration and creative evolution of knowledge-flows
perpetually unifies the Islamic world-systems. This IIE-methodology as derived
from the Qur'an leads to a complex
order with dynamic equilibria in it formed by unification according to the
Divine tenets that rule over all creative functions. Thus the total
knowledge-centered worldview can now be understood as a mapping from the Stock
of Knowledge in the primordial topology to the same undiminished Stock in Final
Topology (Hereafter) with the flows occurring in the experiential order of
human existence (Choudhury, Kybernetes).
Wealth and knowledge
Now to apply the above
knowledge-centered unification methodology to the problem of wealth and knowledge
we proceed as follows: In Islamic knowledge-induced methodology of the
IIE-model formation of wealth comes about as a result of spending in Shari'ah-recommended possibilities. Such
possibilities are causally linked with extensively complementary interrelationships
among and within real and financial sectors and among the agents in such
sectors. From Shari'ah as the
reference point we derive the 'epistemology of unity of knowledge'. From the
extensively complementary relations among diversity of possibilities that
establish the IIE-process in the experiential socio-scientific order, we derive
the concept of 'unification of knowledge' premised on the primal epistemology
of Divine Unity.
The resultant objective
criterion to evaluate in such a process-oriented perspective is the social
well-being function. Its analytical simulation depends upon the sequences of
relations among the complementary variables, all of them being uniquely
augmented by knowledge-flows. Knowledge-flows themselves are circularly inter-related
between the complementing variables, there being action and response among such
knowledge-induced variables and their monotonic relations, in accordance with
interactions leading to integration and these being followed by creative
evolutions.
Wealth is thus not a prima facie economic goal in the Islamic
world-system. It is simply a means of attaining well-being, which constitutes
the true objective criterion. In terms of Qur'an
and Sunnah, absolute ownership of
wealth is not of man's; it is of God's. That is, ownership of wealth is a
communal concept in which sharing, responsibility and realization of private
and social benefits are intermingled.2 To man and society, wealth
like other of its determinants, such as property, resource, money, is a trust.
Islamic political economy inculcates knowledge-induced programs, policies and
instruments in the agents and systems for realizing this responsibility of
social trust (Choudhury & Malik, ).
Production and ownership of wealth
The incentive on the owner
to generate and hold such a shared notion of wealth as Divine trust is derived
from the interconnection among the concept of personal rights, social duties
and responsibilities. Indeed, such a complementary concept of production and
ownership is today ever becoming more pronounced in the emerging age of
ecological revolution and social becoming (Hawley, ; Priotz, ; Korten, ).
Fusion type income
multipliers generated by knowledge-induced spending function in the context of
IIE-methodology suggest that private ownership and social ownership are
monotonically and causally interrelated. That is, increased wealth comes about
through spending in social goods (not necessarily public goods). Such spending
in real goods and services in concert with the complementing financial
instruments increases factor productivity. Consequently, private ownership is
legitimized. But the well-being function of wealth also intensifies
complementarity between private and social ends. Thereby, the social value of
wealth increases. The result then is an individual production and holding of
wealth that realizes simultaneously the private and social ends through the cycle of knowledge-induced
complementarity among complementary ethical possibilities, ends and objectives.
Distribution of wealth
Apart from the production
and ownership of wealth, its distribution forms the third attribute of the
well-being criterion. Distribution is the natural consequence of consumption
and production. In the case of wealth, consumption may be associated with
ownership. The medium of spending in productive activities as recommended by Shari'ah in view of the tenets of Divine
Law of unity of knowledge, leads to the production of wealth. Thereby,
distribution of wealth is derived from the complementary actions among factors
of production to share, own and generate ethically valued possibilities. Such
values are then determined in the market order but with social guidance of the
market to correct for ethically unwanted consequences (Holland, ). The concept
of distribution of wealth is thereby a two-pronged one. First, there is
complementarity among factors of production during the production of wealth.
Then there is complementarity in the act of sharing the same socially with
others. In this lies the act of charity, which is not a hand-out but the
principle of sharing and thus giving up the acquisitive passion to accumulate.
The idea of sharing wealth
inter-communally when taken in its widest sense of local and global community
is particularly realized through the instruments of institutionalized charity
called, Zakah. Zakah forms a take of 2.5 per cent on accumulated assets that exist
in or can be converted readily at a time into liquidity. Besides, there is a
similar levy on stocks of cattle and hoarded jewelry. But invested capital that
cannot be converted in liquid form at a specific time is not subject to Zakah. Current consumption and
depreciation of assets are deducted from existing wealth before Zakah is levied. The purpose of Zakah is to ameliorate the basic
well-being of the very poor and deprived, those who are in dire need of
life-fulfilling essentials. It is also used in promoting the cause of Islam.3
Apart from Zakah for ameliorating the poor there is
voluntary charity called Sadaqah.
While Zakah can become a function of
the Islamic tax law, Sadaqah is not
mandatory. However, there is no injunction against the two being combined into
an integrated way of spending if this is found to be socially recommendable. It
remains the duty of the decision-makers through participation in the
IIE-process to find out ways, means and interpretations of these details.
Formalization
of knowledge-induced economic interrelationships in relation to the wealth
function
The premises of
knowledge-induced economic transactions pertaining to spending in the real
economy that is linked with the financial economy and the negation of savings
as opposed to resource mobilization in this system, lead to formal
relationships of exchange that are distinct from those formalized by mainstream
economics. We will investigate this topic now.
Wealth as a trustee ownership formed through systemic
participation existing pervasively in the IIE-model, causes sharing and
distribution to occur. Complementarity in the productive and socially meaningful
sharing of wealth causes wealth to grow with increasing multiplier. These
characteristics of production and sharing of wealth must mean that moderation
and appropriateness are endemic in the economic system wherein goods are
transacted and thereby income and wealth are produced, owned and distributed.
Moderation and
appropriateness of the above kinds of transactions can be relevant only in one
form of development regime. This is the regime of dynamic basic needs. They diversify and complement among themselves
as technological diffusion occurs through the unification process of
knowledge-flows. In such a regime of development, manufactures and industrial
products that complement with each other across sectors while satisfying the
life-fulfilling needs are all to be considered as dynamic basic needs. They reach higher vintages with
knowledge-flows that affect phases of development. The dynamic basic-needs
regime rejects those technology, consumption, production and resource use that
do not bring about real sectoral linkages and do not generate fairness and
justice among all in the ownership and distribution of wealth. The way to
develop such preferences is through the pervasively learning experience in
IIE-world-system.
Besides, dynamic basic needs
cause stability in prices and a control of waste through the underlying
ecological consciousness. Price stability in turn induces cost control and
hence economic efficiency in production and investment. This generates factor
mobilization and productive enterprise. An increase in production along with
factor utilization in dynamic basic-needs menus stabilizes factor productivity.
We have now a market
exchange wherein shifting productivity curves occur principally due to
complementarity among factors in the production menu. The neoclassical
assumption of factor substitution is now totally abandoned. The opportunity
cost question is replaced by the effect of knowledge on the evolution of fuzzy
allocative factor and output trajectories, specifically shown in figure 1 by
regions R1, R2, R3, R4, R5.
Price relatives of substitutes cannot exist as a result. Price relatives are
now defined by complementarity in the markets of factors and goods. Absolute
prices are formed through classical exchange and not through the marginal
utility concept.
Figure 1 shows the
interrelationships among production, complementary factor utilization, resource
mobilization as opposed to savings. The net result is price stability over all.
This is also the cause for the joint realization of economic efficiency and
productivity. The result is a gain in overall well-being. The well-being of
consumers is increased by price stability for goods. The well-being of
producers is increased by factor price stability (w,r), w denoting wages, r
denoting rates of return on capital. Complementarity among goods and factors
cause similar shifts in the demand and supply curves. The result then is price
stability in the general equilibrium sense.
The consequent increase in
output is indicated by the positively sloped trajectories in Quadrant 1 for
productive factors, L (labour) and K (capital), and in Quadrant 2 for outputs,
Q1 and Q2. The fuzzy domains, {R1, R2,
R3, R4, R5}, shown in each of the
Quadrants are the result of IIE-induction by knowledge-flows. They describe the
process-oriented transformation underlying the variables as shown. In each of
the Quadrants the fuzzy domains indicate the multiple knowledge-induced
evolutionary equilibria generated by IIE-methodology. These are the result of
interactions and complementarity (integration) followed by creative evolution
in the variables, as in dynamic basic-needs regimes of development.
The interactive role of
endogenous interrelations between knowledge-flows and real economic variables together with their relations is
indicated by the two-way arrows emanating from the Quadrants as shown. That is,
commencing from any Quadrant, complementary relations will flow to the other
ones. A process-oriented explanation of flows of goods and services in a
general ethico-economic equilibrium system is thus accomplished by
IIE-methodology.
Finally, the opposite kind of relationship is shown by
replacing r, the rate of return, by the rate of interest, i, in the
neoclassical case of resource allocation. The rate of interest appears in the
financial sector. Labour utilization is known to have a negative relationship
to the rate of interest. Thus factor substitution is regenerated in the case of
interest as the cost of capital replacing the rate of return. We are then back
into the neoclassical case of resource allocation between factors and goods as
substitutes or as 'localized' complements. There cannot exist 'global' and
permanent complements in the neoclassical production and utility functions, for
then relative prices cannot be observed.
It can then be readily shown by means of opposite shifts
in the demand curves and the supply curves of the two substitutes that price
instability due to marginal substitution reappears in resource allocation. This
leads to loss of welfare either for the consumers or the producers. Inequitable
distribution of goods follows as substitution leads to displacement of factors
in competition with each other and for short-run profit motivation of
producers. Indeed, economic history has shown that labour is always the
alienated factor in the capitalist menu of production. Along with the
substitution of labour in the aggregate production function, the sectoral
preference also shifts in the direction of the preferred factors and the goods
that intensively use such factors.
We note therefore, that in
the neoclassical production menu and markets the convenience of optimization
and steady-state long-run equilibrium without an explanation of the process as
to how such states are arrived at through interactions, causes socially
unwanted and wasteful ways of resource allocation. Optimization criterion
remains incapable in explaining the novelty of learning in a process-oriented
system (Shackle, 1971). Despite this fact the optimization methodology has been
forced into learning models of the neoclassical type (Arrow, ).
Eventually, through resource
depletion such a waste of displaced factors raises the resource depreciation
cost as a social cost. Inflationary pressure then becomes a structurally driven
phenomenon caused by marginal substitution between outputs in Quadrant 2.
Marginal substitution between outputs is also a source of factor immobility
caused by the difference in factor utilization techniques of the production
menus. Besides these problems, the rate of interest compounds the problem of
inflation and substitution between goods and resources, as investment and
spending are held back and the productive use of money in real economic
activity is impeded.
In received economic theory
the absence of social costing in average cost pricing method ignores the hidden
inflationary effect of social cost. The measure of inflation as a simple rate
of change of market prices assumes such prices to reflect the true value of
transactions, which is fallacious. The resulting straightforward measure of
inflation that does not account for social costs is a source of inequitable
distribution of resources and incomes. The fact is well established by the
Phillips-Curve tradeoff or adverse relationship between equity (employment) and
economic efficiency (price level).
Figure 1: Over all price
stability, economic efficiency and productivity caused by the principle of
pervasive complementarity among economic variables
Neoclassical economic methodology of marginal
substitution is the pervasive reasoning in entire economic theory, both in
microeconomics and macroeconomics. Even when the Austrian school of economics
came close to the discursive knowledge model of the IIE-type, its leading
exponent, Hayek (.) defended the marginal substitution principle. Marginal
substitution principle has been invoked by Douglas North (.) in his
institutional economic studies. Only very recently, North criticized the inability
of economic theory to explain turbulent conditions in the global economy (.).
The theme of complexity in economic theory has only recently entered economic
reasoning (.). There is also a growing realization on complementarity among
those who work in the field of ecology, organization, systems and cybernetics
(Daly, systems & cybernetics). Recently, the theory of endogenous economic
growth would have liked to treat human resource as an endogenous factor in
economic growth (Romer, ). Although this school criticizes the diminishing
marginal productivity of factors in the production function, it continues to
use the concept of opportunity cost of resource allocation. Myrdal's social
causation model comes close to the circular causation and continuity model of
unified reality using the IIE-methodology (Myrdal, ). However, Myrdal was not
interested on using unity of knowledge in formulating his development
perspectives of economy and institutions. Consequently, his concept of dual
economic does not result in endogenous institutions that can carry
knowledge-flows through interactions between institutions and ethically induced
market order.
Valuation of wealth
Critical variables and their
interrelationships that bring about the production, ownership and distribution
of wealth in the Islamic political economy can now be brought together to
provide an alternative method of valuation of wealth. We examine this
alternative formula below.
To begin with we note that
the concept of time value of money, opportunity cost of resource allocation,
and thereby of marginal rate of substitution, are all rejected on
epistemological grounds of unity of knowledge in the knowledge-centered
worldview. The methodology of the knowledge-centered worldview is based on
interactions, complementarity and creative evolution continuously realizing
processes of unification of knowledge-flows in the IIE-model.
Let, i = 1,2,…,n denote partners in participatory projects;
j = 1,2,…,m denote the number of
participatory projects;
t =
1,2,…,T denote time periods for capitalization of resource and cash-
flows from the
projects.
In all the variables that
follow there is the implicit appearance of knowledge-flows over time and across
agents and projects. It will be seen that without this fundamental assumption,
the valuation model in participatory rates of return that follows cannot be
defined.
The profit variable
(cash-flow) for ith participant in jth project at time t is defined by, pijt = [pijt.qijt
- (wijt.Lijt - rijt.Kijt)].
Total cash-flow from all
participatory projects for ith participant at time t is given by, pit = Sj=1m pijt.
Total profit or cash-flow
for all participants over all projects at time t is given by,
pt = Si=1n Sj=1m pijt.
Because of the participatory
nature of the projects the rate of return as payment to ith participant in jth
project at time t is given by,
rijt = pijt/pit = f1(wijt,
Lijt, Kijt, Qjt),
where, Qjt
denoted the output of jth project (production menu) at time t;
f1(.) denotes the
functional relation of the complementary type among the
variables shown in a
participatory production system (i.e. multiple participatory projects).
Likewise, the wage rate of
jth project labour paid by ith participant at time t is given by,
wijt = f2(rijt,
Lijt, Kijt, Qjt).
The same properties of
complementarity hold for f2 as for f1.
The untenable concept of time value of money in Islamic
asset valuation is replaced by considering forward annual growth rates, gijt,
of cash-flows, pijt, arising from jth project
for ith participant at time t.
Forward valuation formula of
cash-flows from the participatory projects taken together for all participants
at the end of project life, T, is given by,
V(pT) = SiSjSt [pijtPijt(1+ gijt)].
V(pT) denotes a complex
matrix-valuation [pijtPijt(1+ gijt)]at a
point of time t. The assumption of complementarity among projects and
participants simplifies simplifies the above expression by providing a linear
growth rate of profit-shares as cash-flows, gt, over projects and
agents.
We obtain,
V(pT) = StSjSi [pijtPt(1+ gt)] = St Pt(1+ gt)] x [Sj=1mSi=1n pijt] = St=1TptPt(1+ gt)
Note that the growth rates must now be estimated by means
of simulation in response to post-evaluation and future organization of the ethico-economic
IIE-process, wherein at any period of time interactions specific to agents and
real socio-economic variables are observed, analyzed and inferences drawn. The
subsequent time-period growth rates are formed by creative evolution that
follows from the interactively generated consensual view in the previous
process. We thereby note the basis of the growth rates in terms of rijt.
That is, gijt = (pijt - pijt-1)/ pijt-1 = pijt/pijt-1 - 1.
This expression can be
re-written as,
gijt = (pijt/pit-1).(pit-1/pijt-1) - 1 = rijt/rijt-1
- 1.
That is, gijt = rijt/rijt-1.
The valuation formula is now
expressed in terms of the participatory rates of return. It shows the
substantive process-oriented basis of determining such rates and the valuation
of assets in Islamic knowledge-induced worldview.
Without the tacit assumption of knowledge-induced
interdependence among the rates of return and hence among the cash-flows across
participants and projects we cannot simplify the expressions as done above.
More importantly, competition among agents and projects will bring back
marginal rates of substitution among these entities. Sustainability of the
projects and agents over developmental phases cannot hold. The concept of time
value of money and cash-flow discounting enters the valuation methods. Growth
rates are then functions of interest rates. They cease to be pure rates of
return in terms of profit-sharing.
Conclusion
Wealth and knowledge are
interconnected human activities by their very intrinsic appeal to human nature.
Wealth brings about the urge for ownership and empowerment. Knowledge brings
about the urge to interrelate with both the human and non-human environment for
deriving the mode of acquiring, owning and distributing wealth as a social
artifact of life. Between the knowledge-centered worldview of conducting human
affairs individually and in a social whole, with pluralism caused by
differentiation and competition, the meaning and functions of wealth change
substantially.
We have invoked a methodology
of pervasive complementarity among diversity of human possibilities to explain
how the epistemology of Divine Unity presents itself in the project of
unification of knowledge by means of an interactive, integrative and
evolutionary methodology. Such a methodology contrasts sharply with that of
marginal substitution in resource allocation found to pervade entire economic
theory, more pronouncedly neoclassical economics. The implications on the
formation, ownership and distribution questions regarding wealth are thereby,
oppositely framed in these two contrasting worldviews.
In the end, we have argued
that the social individual being an organism of the social whole must be
perpetually in the midst of social becoming. Thereby, the precise articulation
of unification of knowledge in the IIE-methodology involving the
politico-economic relations underlying the production, ownership and
distribution of wealth makes the well-being criterion as the central goal for
attainment at all levels. To this is related the details of economic
activities. Among them we have considered pricing conditions, production,
productivity and efficiency, real economic activity complemented with the
financial sector, spending and charity versus hoarding and savings. Wealth
itself is a variable of the social well-being function.