This paper is extracted from a lecture given to the Faculty of Economics,Universiti Kebangsaan Malaysia when the author was Visiting Professor ofEconomics at this Faculty between April and September, 1994.

The topic of ethico-economics is summarily treated here as study of theendogenous treatment of ethics in political economy theory. Such an ethicalendogeneity grounds the strong and globally interactive processes that underliethe general definition of political economy. It gains especial attention, focus and importance in Islamic political economy because of the knowledge-inducedinteractive worldview of this order.

We will approach the subject matter of ethical endogeneity in thestromgly and globally interactive order in the context of the study of resourceallocation and economic growth in the presence of market venue. The subjectmatter of resource allocation is central to the study of the role of private andpublic sectors in economic development. By the latter concept we mean thestructural transformation of the economy along lines of attaining economic efficiency and distributive equity. In Islamic approaches to socio-economicmatters, the focus on these targets assumes a precise and methodological content.The issue then is: Is it at all possible to realize both economic efficiency (the material welfare) and distributive equity (the moral worth) simultaneously in an Islamic economic framework using neo-classical methodology?

Objectives of this Chapter

It is our objective in this chapter to answer this question in an analytical and empirical light. However, we cannot be exhaustive in the Islamic critique of the neo-classical doctrine in an all-comprehending analytical and philosophical depths. We will also not formulate the Islamic politico-economic methodology in its analytical dimensions. For these other details, the reader may refer to the literature. The neo-classical methodology will also be implicated with both the Capitalist and Socialist/Communist doctrines while examining the approach to privatization in the Capitalist transition of the Muslim Commonwealth of Independent States. The neo-classical premise of these doctrines has been well established in the literature.

The Ethical Constraints of Neo-Classical Economics.

According to Phelps, distributive equity is not the focus of neo-classical economic order, because under rational choices, the economistic motive to maximize profits, utility, output and productivity, renders the ethical goal of distributive equity less attractive, more costly to attain than economic efficiency. The same argument relating to rational choice is applicable in another extreme case as well. This is the case of choices between two distributional states -- moral targets. Here first, with no technological change being assumed either in labour or capital, the choices open to the rational individual (firm) are two-fold. If less equity is chosen to more equity, it implies an unethical choice, since the demand and need for equitable distribution remain unrealized. If more equity is chosen to less, then a sacrifice of economic efficiency must be made somewhere in the economic system. Now, in a general intersectorial case of a multisectorial economy, such a trade-off between greater distributive equity and lesser economic efficiency becomes untenable in a market of output optimizing firms and utility maximizing consumers.

This case of market-directed response to agent-specific behaviour in neo-classical economics has also been explained by Sen in terms of what he calls as market consequentialism. This is the idea that market orientation depends upon the types of consumer preferences possible in it. In a neo-classical economic system, market consequentialism cannot be in favour of distributive equity, when scarce resource are being allocated across competing ends for the purpose of output and utility optimization. Market consequentialism assumes an even more aggressive hedonic proportion when utilitarianism is introduced in preference formation in a market setting.

What is Neo-Classical Economic Methodology?

We are now ready to formalize the meaning of neo-classical economic methodology. The axioms of neoclassicism are, (1) existence of full information; (2) existence of transitivity of alternate choices; (3) strictly positive marginal utility/product if and only if non-zero inputs exist.

The immediate consequence of full-information axiom is to enable rational choices. This rational choice is then instrumentalized by the axiom of transitivity. In fact, many economists are prone to identify the concept of economic rationality solely with the axiom of transitivity.

Other consequences also follow from these axioms. The existence of full information in either perfect competition or imperfect competition assumes, that agents are able to maximize their own self-interests and maximize on their individual rational choices. This leads to independence among rational agents, establishing thus a causal relation between economic competition of any kind and the degree of agent-specific independence attained. That is, competition is realized in the presence of the axioms. Besides, if competition exists, then optimal information must be available to agents. This result is a classical one in the theory of perfect competition.

In neo-classical oligopolistic behaviour, two kinds of contradictions appear. First, full information for individual agents does not exist now. Yet the same first-order optimization methodology is maintained to explain resource allocation. Second, in the case of oligopolistic (including duopolistic) collusion, interdependence among agents is explained in terms of competition between colluding firms.

Thus in all cases, an optimization methodology is maintained, although lack of full information would not logically enable this to occur in the case of interdependence. The result then is, that there can be no global interdependence among agents in the neo-classical framework. Oligopolistic firms appear as groups of competitors, as Lindbeck points out. Inter-agent independence thus becomes the converging consequence of neo-classical methodology. This makes resources allocation to depend upon the substitution principle at large. That is, although complementarity can exist between goods (as in the case of intra-oligopoly firms), yet there remains independence and competition between groups. Hence, there is substitution in resource allocation between such competing groups. The concept of global complementarity thereby, loses validity in neo-classical resource allocation methodology.

Independence, competition and substitution as causal relations arising from the neo-classical axioms, also generate equilibrium states of resource allocation. Such equilibrium states depend upon the intrinsic assumption, that independence is the long-run ex post consequence of historical interactions that become exogenous to the equilibrium condition attained. Economic competition in the methodological sense, leads to independence of states in the long run. This is often referred to in the literature as the state of methodological individualism, with agents now having run their historical interactions, to arrive at long-run state of competition, wherein equilibrium is made possible. In this perspective of competition and equilbrium, resources are treated as scarce. Consequently, marginal substitution becomes the logical tool of analysis for neo-classical economics.

Methodological individualism and methodological optimization are conjoint and logical picture of the neo-classical school. They present the individual as self-seeking (not simply self-interested) individuated category pitted against others for optimal share of resources under the motive of enhancing the goals of economic efficiency in the midst of market consequentialism. The resulting competition now explained by the neo-classical principle of substitution, is a picture in duality of being. In respect to the trade-off between economic efficiency and distributive equity, there is duality between these moral and material aspects of human welfare.

In regards to the methodological concept of competition, there remains duality between non-interacting agents. In choices between `goods' and `bads'; between `goods' and `goods'; between `bads' and `bads', there is a basket comprising all these categories as independent possibilities of choices. Thus, the principle of substitution permits the choice between ethical and unethical bundles as permanent possibility, that cannot change in the long run with the advance of knowledge respecting these choices.

The Social Economic Consequences of Neo-classical Economics

The literature on social welfare, social choice and public choice economics is seen as a reformulation of the underlying neo-classical methodology. It is now extended to the political and social dimensions. The result is, that what arises as a methodological problem of neo-classical microeconomics, is now transmitted to institutions, governments and the political economy as well. Thus, political cycles are treated as positivistic observations to explain the self-seeking, perpetuating behaviour of politicians near election times. New institutionalism is a study of transaction cost-minimization, seen to result from the optimizing behaviour of stakeholders seeking to minimize social conflicts. Formalization of social welfare function is a neo-classical aggregation of communal utilities. It is subject to the first and second order conditions of welfare optimization, extended globally over a larger economic space.

In all such economic states, households, factor markets, product markets and governments/institutions reflect the aggregative rational behaviour at the level of individuals and firms. Thus, neo-classicism is made to apply to institutions at large. In this extended sense too, methodological individualism, methodological optimization and competition, followed by their hidden dualistic consequences, cannot attain moral-material simultaneity. Resource allocation of all kinds is subjected to these dualistically substituting consequences.

The underlying dualism of matter and spirit conveyed in the impossibility for moral-material simultaneity and in permanently allowing bundles of good-bad/bad-bad/good-good choices to arise out of substitution, is not resolved by the neo-classical optimal choice on the production frontier. It is also not resolved by imputing technological advance into the neo-classical production and consumption menus.

In the case of determining choice on the optimal production frontier (or portfolio set), such a point is seen as the result of the long-run consequences of competition, full-information, methodological individualism and equilibrium. They appear as choices intrinsically benign to the process of historical interactions among agents. These learning processes become redundant as exogenous factors in neo-classical decision making, once the above types of long-run implications of optimality-equilibrium are assigned. This is true as well -- and in a contradictory way -- for both perfectly and imperfectly competitive firms.

Next, consider the result of technological induction on resource allocation in the neo-classical framework. Neo-classical optimal choices are long-run phenomena. Hence, evolution of the optimal production frontier under technological induction means the evolution of allocative points over the long run. Within every such period of time, the axioms, conditions and socio-economic implications of neo-classical resource allocation, characterize the entire technologically induced trajectory of growth.

Besides, technology as a long-run condition that abides by the optimal-equilibrium state of rational choices in neo-classical order, itself becomes interactively benign. This socially non-interactive nature of technological change, makes it simply dynamically evolutionary over time but not over states. A cause and effect process that should be instrumental in technological evolution, is thereby, absent in the neo-classical version of technological change. Thus, neo-classical technological change remains exogenous to resource allocation. Hence, the neo-classical evolutionary growth trajectory is simply a repetitive exogenous induction of technology over time.

What is Different and New in the Islamic Politico-Economic World View?

1. The Formulation of the Knowledge-Based Model of Polity-Market Interactive World View: Replacing Substitution Methodology by the Principle of Universal Complementarity

It is now clear, that to break away from the trade-off between the goals of social justice and economic efficiency, the neo-classical doctrine applied either to Capitalist or Socialist doctrines of structural transformation, does not work out. Such an ingrained root of substitution between felicitous and productive alternatives in these doctrines, also causes the notion of prices to appear as certain values in either of these systems. These prices turn out to be optimal exchange values in the Capitalist system and conjectured use-values in the Marxist system. But in both, the primally intrinsic worth imputed in the goods by Divine Providence, is epistemologically ignored. Thus, the moral and ethical basis of all epistemologies does not exist in these systems by their very design and inception.

To get away from this epistemologically empty premise of moral-material worth in the goods transacted through market venue, we must therefore, replace totally the idea of substitution by the Principle of Universal Complementarity (Simultaneity). To realize this principle an altogether new epistemological world view must be invoked. This is the interactive knowledge-based Islamic world view that we will present below:

The Islamic polity has its components in terms of the epistemological roots based on the precept that the Divine Laws emanate from a balanced, purposive, just and felicitous order of existence. Subsequently, they aim at interactively integrating the various systems of existence in their minutest details on the premise of the Divine Laws. This is the precept which asserts, that the Unity of God is the cause and effect of the interactively integrated process of the universe and finds its expression both in the realm of comprehension and in the order of cognitive reality. Thus, in the epistemology of the Unicity Precept the difference between the Kantian a priori and a posteriori is annulled. The ontic difference between form and reality too is rendered unsubstantive. The epistemic and the ontic are merged together in the continuous evolution of knowledge through circularity of cause and effect between comprehension and cognition and their dynamic recreation.

Thus, this epistemological premise is instilled into the laws of life and thought in the most extensive socio-scientific domains. They take up textual forms and are recorded, evolved and applied in progression of experience generated by cause and effect. Thereby, institutions and rules are formulated to perpetuate the knowledge derived from the Divine Laws into socio-scientific actions.

The response from the market order to the Islamic polity is thus sensitized by the rule-formation and its impact on the market menus and choices. Such a response is therefore, a set of preferences formed outside polity but in the midst of the interactions between the sets of polity and market preferences. Such reactions from the market order to polity appear as checks, balances, revisions, acceptance or rejection of the previous rules. A post-evaluation thus ensues in the polity box of the past set of polity-preferences and their interactions with the market preferences. The polity and market systems are thus full of the most decentralized groups of decision makers. The pre-requisite for such decision makers (Sharees) is their good functional correspondence with the rule-making methodology of the Islamic epistemological reference, the Shari'ah. It is also required for the decision makers in polity to be of high Islamic character and knowledge to be able to discern the epistemological questions related to specific issues within the total framework of the Unicity Precept (Tawhid and Sunnah).

When the sifting of the interactive preferences between polity and the market order (ecological order) reaches consensus, we say an important juncture of the continuous interactions is attained. Each interaction forms a bit of continuous knowledge; each integration forms a social consensus. Subsequently, fresh rounds of such interactions-integration proceed and knowledge evolves. In this way, it is simply knowledge that unifies all systems of thought and actions through the process of interactions and integrations. The actions formulate the pure epistemic; the responses formulate the pure ontic; the interactions form the epistemic-ontic; and the continuity of the process through the circular chain forms the epistemic-ontic circular causation and continuity model of unified reality attained through the unification of knowledge.

In this system, since knowledge is both the input and output of all systems of mentalistic and cognitive forms, therefore, the equivalence between cause and effect, the epistemic and ontic, the interactive-integrative preferences, and the unification of knowledge based on the uniqueness of the axiom and methodology of the Unicity Precept, establish the Universal Principle of Complementarity. Since knowledge is an affirmation of interactions through progression, and which then realizes cognitive forms, followed by new realms of knowledge, therefore, such cognitive forms must also be progressive. Such a dynamic concept of the knowledge-induced cognitive process and the recreation of knowledge is denoted by the following functional chain:

E(k)->k1}->f1 {x1}->f2 {k2}->f3 {x3}->....

where, E(k) denotes the immutable epistemological premise of knowledge based on the Unicity Precept. This is an optimal stock, which is never realized nor temporally manifest, but is functionally fundamental (foundational) in knowledge formation as flows (evolutionary epistemology). {ki} are flows of knowledge (evolutionary epistemologies) at the i-th round of interactions, i=1,2,... {xi} are the cognitive forms realized by the evolutionary epistemologies. The epistemic-ontic transformations between these variables are accomplished by the functional forms fi. The values of evolutionary knowledge are assigned ordinally in polity on the basis of the polity-market interactions. The knowledge-induced form of functions such as, f=f(x1(k1),x2(k2),...xn(kn)), can assume the most generalized systemic meanings in the socio-scientific order.

The Islamic polity domain shows, that there is direct relationship between institutions, I (Shura in Islamic polity, but taken here in the strictly Qur'anic sense to mean embryonic and pervasive polity over the entire human domain) and the formulation of ethical policies, EP. These ethical policies are made to interact with the market environment. In the market/society interaction the usual general equilibrium relationship is shown to exist: consumption, C relates with production, P and this with distribution, D. In each case these activities are influenced by the ethical policies. This results in the generation of S, social product. The social product S then sends feedback signals to polity in two ways. In the short run, the institutions are influenced to revise their policies and the interactions continue. In the long-run social consensus, SC is formed. This further influences the I and EP sets to generate higher levels of interactions between polity and the market/social system. General equilibrium in the market/society set is shown in terms of integration among the socio-economic variables. General equilibrium in the polity set is shown in terms of social consensus.

2.2. Policy Coordination on the Basis of the Developmental and Institutional Perspectives: Elimination of Interest and Use of Profit-Sharing in Project Related Ventures With Global Perspectives of Economic Cooperation

The role of profit sharing in replacing the Capitalist institution of interest for reasons of social justice and economic efficiency can be optimally realized in the presence of the Islamic epistemology of value, price and money. All of these are then institutionalized in the polity-market interactive process in the broadest sense of economic arrangement. The central point to note in all of these is the endogenous nature of ethics in the moral-material simultaneity of all economic activities. Money too is then an endogenous creation of this system, unlike the exogenously supplied money of the Capitalist system or the labour theory of value in money in terms of valuation of precious metals in circulation as pronounced by Marxist theory of value.

The endogenous theory of price, value and money in Islamic political economy upholds the epistemological stance, that the intrinsic value of all goods is the essence of felicity embodied in them by the primordial order of Divine Creation. This is the root of the social nature that all `goods' commonly share. Any item that does not promote this intrinsic felicity-value is not to be consumed, produced and distributed in the Islamic political economy. The injunction in this regard is formed through the knowledge induction of the Shuratic Process and not through coercion. It is because of the existence of this intrinsically endogenous felicity-value that deprivation, excess and subjectivity cannot constitute part of value and price. Rather, with the increased realization of this intrinsic value of felicity in the polity-market interactions, the above-mentioned disvalues are reduced.

The total value, VT(F), in market transactions can now be written as the sum of value produced by social welfare, VS(F) and value produced by economic welfare, VE(F). Both of these depend upon the common endogenous premise of felicity F. Thus, VT(F)=VS(F)+VE(F). The Principle of Universal Complementarity between economic efficiency and social justice implies, that all of these values must increase together. Thus fundamentally, the knowledge for realizing the felicity-value must be enhanced in the Shuratic Process.

In either the Capitalist or Socialist theories F does not appear. It is replaced by the reductionism of the material order. Hence, the material essence, M, replaces F. Then, VS(M) and VE(M) exist in a trade-off in the relation, VT(M)=VS(M)+VE(M). In the Capitalist order, VT(M) denotes exchange value with its subjective nature. In the Socialist order, VT(M) denotes use-value, say VT'(M).

Now, VT(M(F))-VT(M)=[VS(M(F))-VS(M)]+[VE(M(F))-VE(M)] >0, because of the increasing returns to knowledge, VS(M(F))>VS(M). Here M denotes material essence (e.g. labour power); M(P) denotes material essence generated by the induction of moral values (F). Thus, M(F) denotes moral-material worth (e.g. labour power generated in the presence of intrinsic value of felicity as defined above). Then by complementarity between social and economic values in the Islamic order, VE(M(F))>VE(M), which is realized by significant increases in the social values, carrying along with them the economic values, as denoted by the simultaneity of moral-material worth, M(F), in the above expressions. Hence, with this higher total value of goods in the Islamic order, the element of deprivation, uncertainty, speculation and excess are reduced over the Capitalist and Socialist systems, by the inversion of relations between value and disvalues. Consequently, prices must be relatively lower and more stable in the Islamic political economy, the higher is the total value based on the felicity of the moral-material worth. In the monetary system, this relation means that interest rate, which is an excess and speculative measure, is a disvalue and must be eliminated to yield economic stabilization. It also means that profits (hence profit rates) cannot be extraordinary surpluses. The economic arrangement and the nature of institutional and sectorial interlinkages and cooperative mechanism, all cause such a regime to exist.

In the limit, when interest rate is totally eliminated by this process of knowledge induction, then the quantity of money in the economy will be fully determined by the price of the goods. Hence, money too is determined by the moral-material worth of economic transactions and is thus an endogenous aggregate. Money creation must then mean a flow of currency necessary to monetize the value of goods in circulation. This is the concept of the endogenous theory of money, which plays a distinctive and central role in the Islamic political economy.

The above theorizing in value, price and money also points out that there is an inherent excess pricing in the Capitalist and Socialist economies. This arises from the effect of value difference on the prices through their inverse relationship. Thus, there is an inherent level of deprivation in these economies as well, for now the excess price (either as price of a good, interest rate, wage rate, or rent) is either taken by the Capitalist or by Labour in the Socialist system. None of these is legitimated under the same principle of eliminating deprivation, excess, speculation and uncertainty and their inverse relationship with the intrinsic felicity-value in all goods primordially created by Divine Providence.

Conclusion

The political economy of the embryonic Shuratic Process as a proper and more substantive characterization of the field of Islamic investigation on economic, social and political matters, is distinct in its world view and methodology from the constrained economistic theorizing of mainstream economics. Most notable in this category is the neo-classical school and its multifaceted leaning in other areas of economic doctrines. The Shuratic Process nature of Islamic political economy is rich in its empirical and quantitative policy-theoretic content, unlike the interaction-benign methodology of neo-classical economics.

The Islamic political economy -- not the neo-classical treatment of Islamic `economics' -- on the other hand, is embedded in the complex of interrelationships that form the socio-scientific reality realized in the midst of the Principle of Universal Complementarity in moral-material simultaneity. We now complete the cycle to our original question posed in this paper: A neo-classical treatment of Islamic investigation of economic matters poses a warning to Islamic scholars. In such a mould of thought, no new contributions can be made of the substantively epistemological praxis of Islamic socio-scientific order. The consequence will be either a pitiful methodological nicety without meaningful content; or it will be a defeative scientific, empirical and institutional development in the framework of `Islamic economics', a petrified scientific pursuit that will be unable to touch with and address the question of human predicament, transform the Ummah in body and spirit, and attain the distinctive model of its own. In this regard, the Qur'an points out, "Thus have We made of you an Ummah justly balanced, that ye might be witnesses over the nations." (S.ii, vs. 143)