MICRO-MONEY AND REAL ECONOMIC RELATIONSHIP IN
THE 100 PER CENT RESERVE REQUIREMENT MONETARY SYSTEM
Abstract
The structure of Islamic transformation into 100 per cent reserve requirement monetary system is explained in terms of the foundational epistemology of the unity of divine knowledge (tawhid). In this, the role of micro-money and real economic exchange relations are shown to arise by a natural causality. A comparative study of endogenous money in the quantity theory of money and the Austrian School points out significant differences between the endogenous theory of money in Islam and mainstream methodologies. A formal model of micro-money and its endogenous relationship with the real economy is formulated with the objective goal of realizing well-being, economic stabilization and sustainability of development regimes. Policy recommendations for ummatic transformation into a 100 per cent reserve requirement monetary system with the gold-backed micro-money as currency in relation to real economic transaction according to shari’ah are given towards the end of the paper.
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The principal objective of this paper is to derive a simulative model explaining the interrelationships between money, real economy, prices, economic growth and social well-being. We argue that such a relationship between money and the real economy cannot be explained by the existing macroeconomic conception of monetary relations, and thereby, by the institutional structure of monetary policies in the macroeconomic framework. Substantial changes that follow by redefining the money-real economy relations in view of market forces and institutional structure bring forth the study of specific linkages between money and resource mobilization within the market order. Here a substantive study of micro-money appears.
Furthermore, in the Islamic framework of reference we find that the substantive nature of the model of money and real economy relationship is derived from the Islamic epistemological foundations. We will elaborate upon this epistemological derivation to establish our money-real economy model. The evolution of the paper will thus take us from the premise of epistemological foundations to its translation into micro-money and real economy interrelations. We will show thereby, that the most appropriate monetary system that results in the case of the micro-money and real economy interrelations is the 100 per cent reserve requirement monetary system backed by the gold standard (Dinar).
This paper is divided into the following sections: Section 1 gives a brief review of the literature on the gold standard from which we derive the evolution of micro-money in the history of economic thought. In Section 2 we derive our own specification of micro-money concept after noting its context within the quantity theory of money. In Section 3 we formulate the general epistemological background in the light of which our model of micro-money and its real economic relations is established. In Section 4 we explain some of the glaring methodological contrasts in the concept of micro-money between Islamic political economy and mainstream economic thought. In Section 5 we connect the micro-money concept with a 100 per cent reserve monetary system backed by the gold standard (Dinar). In Section 6 we point out other kinds of endogenous micro-monetary numeraire suggested in recent times. In Section 7 we conclude with certain policy recommendations in favour of micro-money within the context of 100 per cent reserve requirement monetary system.
Section 1: A brief review of the literature: gold
standard and the nature of relationship between money and market exchange
The nature of money has evaded any settled state of its theorizing for quite some time now ever since the gold standard received its demise in the hands of the central monetary authorities in the United Kingdom following the World War I and at about the same time in the U.S.A. These instances were decried as adverse developments in the history of money by economic theorists. The most prominent amongst them were the Austrian School economists.
Within the economic argument of the classical type the gold standard was thought of as any similar commodity that could be freely transacted in the market system setting its own prices without government intervention, and thereby, causing a trend in the general price level in goods and services in exchange (Block, 1999). The gold standard was thus thought to be behind the social philosophy of a free market and private ownership economy in which most importantly the individual made free choices without a statist intervention. It is pointed out that over the long-run trend in prices and real transactions determined by the gold standard there existed a profound stability in the gold price level despite certain short-run exceptions.
On the classical understanding of the gold standard Block (1999, p. 15, bracket by the authors),
My argument is that the gold standard is the only financial arrangement compatible with such a vision (free market and private ownership with minimum government intervention).
On the fairly stable trend of gold value over a long time period Hayek (1999 reprint, p. 169) observed,
Under actual world conditions, however, gold may well be the most reliable and acceptable monetary standard, a conclusion that the experiences of the last years and decades support despite superficial impressions to the contrary.
By and large the economic argument against the demise of the gold standard was the rise of powerful statist intervention and the hidden agenda of the powerful bankers to gain undue financial windfalls by treating an over supply of paper money as commodity on which interest rate can be freely earned. Paper money thus arose as commodity money as an economic item independently of market exchange of real goods and services. The fractional reserve requirement monetary system gave support to the explosive growth of money supply. Individual preferences were thus fuelled by the lure of holding money in excess of the demand for real goods and services. This excess spending inflated the price level or it was saved, in which case there was resource withdrawal by the competing financial sector militating against spending in real market transactions at every point of time.
The result of the competing dichotomy between the financial sector and the real economy causes an improper measurement of value of exchangeables over time by means of interest rate as the price of money. The argument behind this impropriety of interest rate can be deduced from the analysis of intertemporal resource allocation given by Hayek (1999, pp. 193-226). Hayek’s explanation runs as follows. In neoclassical economic analysis the intertemporal value of exchange is measured either by the ratio of the prices of goods and services under exchange or by the ratio of the marginal utility of such money-good exchangeables. But over time such goods, and thereby prices, go through interaction. It then becomes difficult to know the exact price ratio, and hence, the dynamic equilibrium conditions of exchange. In the intertemporal context, prices are definitely affected by the supply of money that occurs by the formation and liquidation of savings over time. Thus the price relatives occur according to the following ratio, (interest rate: price of good 1: price of good two: … etc). Consequently, there is no way of isolating the intertemporal prices from the influence of interest rate as the price of money fuels its effect on the prices of goods and services.
Such a problem was also noted by von Bohm-Bawerk, (1890) who found that it was impossible to isolate the interest from the pure exchange components in the levels of production profit. In all of neoclassical economics and Austrian economics the theory of interest and intertemporal price effects of interest assumes a roundaboutness of production in turning one good into another good by resource allocation according to their relative prices and saving over time. Such a price relative is taken as the measure of value. Over time, one of the prices is the rate of interest in the price ratios that evolve. Yet such a valuation remains indeterminate by virtue of its failure for exact measurement intertemporally.
The Austrian analysis of money and prices seen in terms of ratios of intertemporal prices and interest rates is a microeconomic analysis that can be subsumed within the macroeconomic picture of the quantity theory of money and prices and the ‘real bills hypothesis’. Green (1989, p. 310-13) points out that ‘real bills’ are exact claims on money demand in view of transactions relating to the real goods and services. Thereby, any excess supply of money is returned back to the monetary issuer in the long run. The issuance of the appropriate quantity of ‘real bills’ assumes that non-bank preferences are fully determinate. In this kind of equality of the real bills, currency money exists in tune with the demand for money in the equation of exchange according to the quantity theory of money. We then have the equation of exchange in the form (Friedman, 1989, pp.1-40),
M1V1 + M2V2 = PT = Py (1)
Where, Mi is the money in circulation in the ith goods basket;
Vi is the velocity of money in circulation;
P is the general price level of goods and services transacted in the economy;
T is the number of transactions performed by the circulation of the quantity of money, M1+M2;
y is per capita national income;
i =1,2 goods or markets.
The identity (1) can be generalized to any number of specific transactions including the market for securities. The resulting quantity of money expressed as the demand for money, MiD, then is,
MiD = P.D(y,w,i1, i2, u), (2)
where, w denotes the capitalized wealth;
i1 denotes interest rate on money assets;
i2 denotes interest rate on securities;
i1 and i2 can be furthermore considered as term structures of interest rates over
different kinds of assets over time.
u denotes all other variables, most importantly non-bank preferences, as in the
‘real bills’ hypothesis;
Section 2: Definition and analytics concerning micro-money
A generalization of expressions (1) and (2) in view of the intertemporal nature of asset valuation with money prices and the influence of interest rates on price ratios, as in the Austrian School with its neoclassical perspectives, now brings us to the definition of micro-money. Micro-money is the money in circulation specific to particular goods, services, assets, also clientele and thus multimarkets. Now to understand the meaning of micro-money we must turn firstly to the specific markets for real transactions and to the preferences of the non-banking agents to determine the quantity of money that needs to be in circulation to finance such real transactions.
Our definition of micro-money requires a broader deconstruction of the expressions (1) and (2) of the quantity theory. The new identity would involve a number of critical structural changes with regards to institution-market interaction relating to central bank-commercial bank-clientele (market) interrelationships in the context of a further extension of the above-mentioned gold standard system to the case of 100 per cent reserve requirement monetary system. This interrelationship is explained later on. To address such issues we will formulate a comprehensive model of micro-money in relation to real economic transactions in the 100 per cent reserve requirement monetary system with the gold standard (Dinar).
Some initial problems are to be noted in the quantity theory identities (1) and (2) with regards to the concept of micro-money. A strict definition of micro-money with respect to the market transactions that micro-money serves within an arrangement of optimal private ownership and independent choices by agents must specify these in the same equations of exchange. This specification appears as follows:
SiMiVi = SiPiyi (3)
Where, Pi denotes price in the ith market;
yi denotes per capita income in the ith market;
i = 1,2, …, n.
The expression like (3) has not appeared in the equation of exchange particularly due to the inability in defining the right hand side in terms of a total quantity of money in circulation. However, by allowing for a large number of multimarkets with borrowing in the Walrasian sense of the entire economy being viewed as the sum total of such equilibrium multimarkets, an equilibrium in the micro-monetary sector will cause a simultaneous equilibrium in the corresponding real goods market (Henderson & Quandt, 1971). Expression (3) now devolves into,
MiVi = Piyi, for each i = 1,2,…,n (4)
We re-write (4) as, MiVi/Piyi = MjVj/Pjyj.
That is, MiVi/ MjVj = Piyi/ Pjyj = (Pi/Pj)(yi/yj) . (5)
Expressions (4) and (5) convey the meaning that for the total volume of micro-money in financing the nominal value of transactions in the ith market, relative prices in money terms between the markets must remain stable and the markets must be in equilibrium. This result would assume well determination of the agent-specific preferences as in the case of the ‘real bills’ hypothesis. But the same result on the existence of pre-determined stable and equilibrium relative prices negates the complex nature of intertemporal price and quantity relations as explained by Hayek’s analysis of intertemporal resource allocation. Consequently, the above kind of deconstruction of the exchange equation of the quantity theory of money does not contribute to any fresh understanding of interaction in multimarkets with the presence of money prices affecting exchange prices in terms of the influence of micro-monies in those markets.
The underlying debility of the quantity theory with respect to micro-money goes deeper. Despite the limited microeconomic disaggregation of the quantity of money on the right hand side of expression (1) the appearance of the macroeconomic aggregate national income in nominal terms on the right hand side implies that monetary policies are still controlled by the central bank and the fractional reserve requirement relations exist between the central bank, the commercial banks and markets. Monetary policies have weak or no positive effect on micro-money. This was the complaint of the economists who favoured the gold standard against the statist idea of money that led to the abandonment of the gold standard. In this regard, the guru of the gold standard monetary system, Ludwig von Mises (1981 reprinted, p. 480-81) wrote against the political causes that were behind the abandonment of the gold standard,
Sound money still means today what it meant in the nineteenth century: the gold standard.
The emergence of the gold standard consists in the fact that it makes the determination of the monetary unit’s purchasing power independent of the measures of governments. It wrests from the hands of the “economic tsars” their most redoubtable instrument. It makes it impossible for them to inflate. This is why the gold standard is furiously attacked by all those who expect that they will be benefited by bounties from the seemingly inexhaustible government purse.”
Walter Block (1999, p. 16) has pointed out the anomaly between Friedman’s quantity theory and his hidden opposition to the gold standard. Friedman (1960, p. 40) is cited (with author’s emphasis within bracket):
The fundamental defect of a commodity standard (read gold standard) from the point of view of society as a whole is that it requires the use of real resources to add to the stock of money. … If people will accept as money pieces of paper on which is printed ‘I promise to pay – units of the commodity standard’, these pieces of paper can perform the same function as the physical pieces of gold or silver, and they require very much less in resources to produce.”
From the above discussion we note that in the quantity theory of money both the analytical as well as the institutional contexts of micro-money fall short of their proper definition with respect to real economic transactions. The analytical perspective shows a serious problem of aggregation in the micro-money model of the quantity theory. The institutional perspective points out the need for a new arrangement between the central bank, the commercial banks and markets within a gold standard and with the full force of market exchange determining the micro-money and real economic interrelationships. We now turn to these issues.
Section 3: An epistemological model of micro-money and real economic transactions in Islamic perspective
The institutional and analytical problems of micro-money in the quantity theory of money leads us to investigate whether these problems can be addressed by received mainstream economics or is another methodology required. The quantity theory as formulated being an identity, it cannot answer the following question: Does money affect price level or does the price level affect money stock in circulation through the output effect (Laidler, 1989)?
To answer the above question we note that in the gold-standard system that was conceived by the Austrians the creation of money presupposes a well functioning economic order based on consumption and production and higher transformation processes of these activities. The question then is whether there is a circular relation between economic activity and the quantity of money? Heilbroner looked into this problem by invoking Marx’s circular causation model that explains the capitalist economic order as the medium of commoditizing money. Heilbroner (1985) thereby explained his M-C-M model: money stock (M) leading to its commoditized value (C), which happens through the rate of interest as the price of money, and C thus leading to more money stock.
Keynes’ on the other hand considered the complete independence of money and monetary policy in his general equilibrium model. Thereby, money and the price of money as interest are both seen to be exogenous economic factors set independently by the money market and controlled by the monetary authority. In neoclassical economic theory there exists no causality between money and real exchange. The two variables appear as competing assets governed by the marginal substitution hypothesis between money and real assets each being endowed by its own price.
Monetarism (Cagan, 1989; Yaeger, 1997) holds that aggregate spending is predominantly determined by the quantity of money although the quantity theory version of monetarism also examines feedback from the side of economic activity to money supply. Monetarism takes a policy-oriented approach toward stabilization of price level and output by controlling the money supply. The monetarists thus debate the Keynesian argument in that aggregate demand is more significantly affected by expenditure than by the holding of money.
Between all these contending approaches we find that money is either an exogenous asset created by the central banking authority to establish price and output stabilization or when there exists endogenous feedback between money and economic activities the exact nature of the price-money causality is not determined. Furthermore, in all such feedback models there exists the permanent prospect for inflationary pressure, as spending can forever cause upward pressure on output and prices. Such a model of indeterminacy between the quantity of money and price level through the output effect is referred to as monetary disequilibrium caused by a host of environmental factors that are always and everywhere governed by the monetary phenomenon according to monetarism. In the end, the question of stable price and output effects in relation to the feedback between money and real economic transactions remains unanswered.
A return to the gold standard with micro-money in a 100 per cent reserve requirement monetary system must analytically answer and realize this very missing phenomenon of the money-real economy linkages in the quantity theory of money and prices. Our critical project is now explained by the building blocks of an alternative methodology and its institution-economy consequences.
The tawhidi epistemological worldview of unity of knowledge in world-systems
Our epistemological premise commences from the following argument. Unity of systemic knowledge as a relational worldview can be realized by means of extensive interaction, linkages, complementarity and their dynamic sustainability according to certain precise economic instruments and preferences (behaviour) that are formed within a political economy that recognizes unity of knowledge as its epistemological premise. Parting away with this critical foundational assumption of unity of knowledge and its attributes in terms of specific instruments, behaviour and methodology will leave any system of money-real economy relations to evolve by the force of uncontrolled anomie, thus leaving indeterminate the money-real economy feedback unchecked.
In this paper, instead of divulging the details of the process model of interaction, integration and creative evolution (IIE-process) premised on the unity of divine knowledge that has been developed in details elsewhere (Choudhury, 1995), we will briefly delineate and use it for formulating our money-real economy model.
Our focus now is on deriving and formalizing a process model of generalized systems as shown below:
W ®F {F} ®f* {F*} ®f1 {q} ®f2 {X({q})} ®¯®f3 New {q} ® continuity ® ……… W=H (6)
W(q,X(q)) in repeated
processes
Primal ®
Derivation® Process of ® Post-evaluation®
Evolution®….Continuity®
Closure
stock of
of primal deriving of similar in the
knowledge
knowledge knowledge processes very
- flows -flows by
discursion large scale universe
In the above string, W denotes tawhidi epistemology. W explains the fundamental Qur’anic axiom of divine oneness. It can thus be understood as the dimensionless but creative and governing origin of knowledge. Hence we treat W as a mathematical topology (Choudhury, 1999) in analytical formulation. W thus comprises the complete revelation, which is the essence of the Qur'an, referred to in the Qur'an as Lauh Mahfuz.
F denotes the ontology derived from W in the form of the divine law (sunnat Allah or kalimat Allah in the Qur’an). F is thus the knowledge domain of the revealed Qur'an in its order of completeness and absoluteness.
F denotes the spontaneous and pervasive unveiling of divine oneness in the cosmic scale through the divine law.
F*
denotes the further ontological comprehension of the divine law embodied in F
through the sunnah of the Prophet Muhammad. This medium of presenting
the divine law in living experience is denoted by the mapping f*.
{q} denotes knowledge-flows derived from the epistemology of unity by the exercise of shuratic discourse at the level of deriving the usul of shari’ah as the core of the divine law.
The medium of shuratic discourse is denoted by the symbol, f1, with respect to stage 1 of the shuratic process.
The primordial
origin of knowledge is W. The process from W to {q}
through the mediums as mentioned above represents the stages of ontology, that
is, the stages of unraveling of the Qur'anic episteme of the laws,
guidance and rules through inculcation of knowledge.
Now to specify, we consider two similar strings of relations shown by (6), one for money and the other for real economic activities. This means that in the epistemological sense money is a creation of Allah for the purposeful use in attaining well-being of individuals and society. Likewise, the economic order is patterned for the same purpose according to ethical values that are to be found in the Islamic Law, shari’ah. These two together, namely money-real economy relationship along with institutional guidance as complementary pairs follow from the Qur’anic principle of the ‘paired universe’ in the good things of life.
The interrelationship between money and ethical values is pointed out in the Qur’an (18:19). The Qur’an encourages trade as opposed to interest-based transactions (Qur’an 2:275). The intrinsic nature of stability within world-systems between its diverse possibilities is explained by the substantive meaning of justice (a’dl), compassion (ihsan) and balance (mizan). All these are unraveled by the exercise of collective action in concert with the human presence in world-system. Such a co-planar interactive discourse leading to consensus and further evolution of the same is the broadest meaning of the embryonic shura in the scheme of things. Hence we have the derived term shuratic process from the chapter Shura in the Qur’an. Systemic interaction (diversity) followed by complementarity (consensus by the principle of paired universe) and the further evolution of such a process by the depiction of the Qur’anic creative order (khalq in-jadid) equivalently characterizes this IIE-process or the shuratic process.
The IIE-processes within and between the money-real economy relations are represented in expression (7):
Below, the symbol;denotes lateral and vertical interaction between the corresponding categories in the two inter-systemic IIE-processes as shown.
Money
F1: W®F {F}®f*{F*®f11{q1®f21 {X1({q1})}®¯®f31New{q1}®continuity®W=H (7)
W(q1,X1(q1)) in repeated
processes
Real Economy
F2:W®F{F}®f*{F*}®f21{q2}®f22{X2({q2})}®¯®f32New{q2}®continuity®W=H (8)
W(q2,X2(q2)) in repeated
processes
We obtain the following IIE-interrelationships, which are uniquely governed by the fundamental epistemology of tawhid, W:
® {q1}®f21 {X1({q1})}®¯®f31 New {q1} ®continuity ® MONEY
W(q1,X1(q1))
¯
W: ; ; ; ; ; W=H ….. (9)
¯
® {q2}®f22{X2({q2})} ®¯®f32 New {q2} ®continuity ® REAL
W(q2,X2(q2)) ECONOMY
By the elementary complex disaggregation of relations in expression (9) we note that,
{q1}®f21 {X1({q1})}® f31New{q1} MONEY
; X ; X ; X ; X ; … (10)
{q2}®f22{X2({q2})}® f32New{q2} REAL ECONOMY
Here, X denotes crosswise inter-systemic interaction. Such an interaction is extensive in nature, as can be worked out even from this simple disaggregation when extended to second and higher numbers of processes (not shown). The functional mappings existing between extensive interactions, as shown, generate compound functions (Choudhury, 2000a).
The well-being criterion function resulting from pervasive interaction across the interactive, integrative and evolutionary branches of (10) is represented by non-linear and complex aggregation of the separate well-being functions belonging to these branches at their nodes. One such non-linear functional form would be the product function with indexed coefficients being the well-being elasticity with respect to the variables of the well-being function. The resulting non-linear aggregation of the well-being function conveys a cardinal measure of complementarity among the various variables and their relations appearing in the formation and measurement of the well-being function. Among the variables of this criterion function are the policy and institutional ones. These imply the necessary condition of participation among agents in the underlying decision-making process.
The joint result of interaction among the variables and their relations lead to the compound form of the branches of the IIE-processes. Such a compounding of mappings and relations is thus seen in terms of variables, their relations, the resulting well-being indexes corresponding to such branches, and their representations in the resulting well-being function. In this way, the attainment of complementarity among agents, variables and their relations signifies the meaning of integration following interaction among the entities. Finally, from the continuously dynamic nature of knowledge-flows affecting decision-making, variables and their relations, emanate the evolutionary processes of further knowledge-flows and the knowledge-induced entities of world-systems.
The evolutionary nature of the interactive and integrative processes at each stage brings out the importance of a simulative method for quantitative analysis in this interactive, integrative and evolutionary methodology. The emerging method here suggests replacement of all steady-state equilibrium points by multiple evolutionary knowledge-induced equilibriums. Consequently, optimization as a method of holding the variables in an assumed end-state of equilibrium by controlled movement in the variables made possible through tradeoffs among them is totally rejected in the IIE system. Optimization cannot be an acceptable method for studying IIE world-systems phenomena where continuous learning is in place. Thereby, in such a model there cannot exist any terminally attained rest positions, except in the instantaneous case of the variables and thus their instantaneous relations and the underlying decision-making among agents. Such an instantaneous case cannot be sustained in knowledge-induced circular causation and continuity models of learning.
Besides, the presence of the unification of knowledge attained through the principle of universal complementarity and its evolutionary learning capability rejects the idea of scarcity and constriction in resource supply. Consequently, the idea of marginal substitution to be found in neoclassical economic resource allocation is negated. The circular causation and continuity model of unified reality represented in the IIE-worldview makes risk-diversification, product-diversification, institutional development and participation among the agents, variables, resources and their relations to have permanent consequences of evolutionary learning. Knowledge augmentation by means of new learning constantly reduces the risk and unit cost of production and investment through product-, risk- and economic- diversification in the framework of the unity of knowledge as signified by the principle of universal complementarity across diversity.
The inter-systemic generalization of the knowledge-induced model
Expressions (7) and (8) can now be extended to inter-systemic relations. The evolution of the interactive and integrative sequence of knowledge-flows and their knowledge-induced socio-scientific variables now yield a formulation for the well-being function that is interconnected across numbered systems in respect to the number of ensuing interaction. Furthermore, in these relations relevant variables and their relations can be included. Thus the expressions (7) and (8) now expand and grow in complexity but maintain order. The end result is a massive tree, whose every branch sets forth a relational order between different parts of the tree (nodes) and these are caused by knowledge-induction. Its fruits, leaves and other benefits denote the knowledge-induced result in observed forms. These forms present the divine evidence of goodness as the cause of well-being.
From this complex plane of knowledge formation determining knowledge-induced forms, and thereby the well-being criterion, comes about growth and the evolution of processes into higher levels of similar kinds of knowledge-induced complex relations. Thus each branch is the result of a micro-IIE-process, which then combines and coordinates with other similar ones to form larger IIE-processes. Such interconnections may be seen as the cause and effect of extensive and pervasive complementarity among diversities of possibilities. In the end, knowledge-flows, their knowledge-induced forms and their well-being function and relations are taken into account across branches of interaction, integration and evolution (IIE). We thus derive a nexus of IIE-relations following the circular causation and continuity model of unified reality. In such a knowledge-induced nexus prevails the principle of universal complementarity among diversities of socio-scientific possibilities across systems.
The well-being objective criterion defined
The well-being objective criterion function is thus an evaluative criterion to test the extent to which complementarity among the diversities of possibilities included in the function, has been realized. Thereby, the IIE-model determines the attained level of well-being in the learning process by means of heuristic and empirical evaluation. Such well-being criterion functions are very numerous across the nexus of interrelationships corresponding to the processes within world-systems.
According to the prior discussion on simulation as the appropriate method for studying the processual nature of the IIE-model we now note that the goal of the IIE-model in the general-system framework is to simulate such a social well-being function, subject to the complementary relations among variables that are included in the well-being function. The evolutionary aggregate well-being function is a compounding of all the elementary social well-being indexes along branches of the knowledge-tree.
On denoting numbered systems by l and k, with k ¹l (=1,2,…), and interactions by i = 1,2, …., we obtain the detailed version of the simulation chains for the IIE-epistemological circular causation and continuity model shown in (7) and (8). This is shown in expression (11).
W ®F {F} ®f* {F*} ®f1 [qikl] ®[f(ikl)] [X ikl({qikl})] ®¯®[f ‘(ikl)] New[qikl] ® W=H ..(11) [W([qikl],[X ikl(qikl)]]
The square brackets indicate the matrices of variables, relations and well-being functions corresponding to the ([qikl],[Xikl(qikl)])-entries across (k,l)-systems for given numbers of interaction (i). The same matrix meaning applies to every monotonic transformation of the relations of expression (11) starting from f* and onwards, except for W=H, which cannot be augmented due to its completeness.
The epistemologically derived specific
model of money-real economy relations
It is noted that every variable of the well-being function is of the micro-type. Aggregation to higher levels of ethical decision-making is explained by IIE-type compound mappings that result in non-linear multiplicative indexes. Although the IIE-expression (10) is a generalized form applicable to all types of socio-scientific problems in the framework of tawhidi unity of knowledge, its specificity to the money-real economy interrelationship will now be formulated. The simulative form of the money-real economy relationship is explained by the following system pertaining to (11) in the light of (10).
Simulate {qikl} [W([qikl],[X ikl(qikl)]] (12)
Subject to the circular causation recursive relations,
X ikl(qikl) = f jkl (X jkl(qjkl)), (13)
qikl = g jkl ([qjkl],[X jkl(qjkl)]) (14)
i,j (i¹j) = 1,2,….;
k = monetary system; l= real economy.
All variables are to be taken in vector notation. f jkl and g jkl are recursive relations of the circular causation model over interactions (i) within and between the k,l-systems.
Specifically, we can write for money and two markets both endowed with a limiting consensual value of qi = q* over k and l,
X ikl(q*) = (Mk1, pk1, yk1)[q*], (15)
k,l =1,2 as k = micro-money specific to two categories of spending and valuation in markets, l = 1,2.
The nature of complementarity across diversity and dynamic evolution in the well-being function is causally linked with complementary relations between every one of the variables in the vector (15). This means that ethicizing markets emerge by complementary spending in real goods and services, whose valuation is shown in terms of micro-money supporting such complementary spending patterns. Likewise, the existence of regimes of dynamic basic needs as life-fulfilling goods cause complementary outputs in the two sets of goods and services. There is no substitution now, only relative choice within a discursive framework interlinking money and real economy through the medium of the shuratic process, as explained earlier.
Such unifying relations among the variables require appropriate development and policing of money-market linking instruments. Examples of such instruments are valuation in the absence of interest-based discount factors, equity and profit-sharing joint venture instruments revolving around economic cooperation, trade financing and secondary instruments that revolve around these principal ones. Above all, there is the central role played by human resource development along the lines of the ummatic transformation in the light of the tawhidi worldview. All of these knowledge-inducing factors and instruments are comprised in the q-induced policies and preference changes determined in and by the IIE-process.
When an evolution from lesser to higher regimes of micro-money and real economy linkages are being established in the knowledge-inducing systemic change, q-induced policies and preference changes determined in and by the IIE-process are once again active in progressively reducing the marginal substitutions between the goods and services and thus creating greater complementary relation between them. The unwanted goods and services are thus phased out by the q-induced policies and preference changes determined in and by the IIE-process. In this way, the progressive evolution of the interactive and integrative processes reflect growing unification and responsiveness between the variables in a regime of change characterized by convergence between the growth rates of spending and the quantity of micro-money. This is a sure sign of progressive reduction of instability and inflationary pressure in the economy with pervasive money-real economy linkages. With gains in output arising from the side of technological change, organizational efficiency and accentuated mobilization of resources (spending) the money-economy interrelationship would yield the growth rate of output to exceed the growth rate of spending and price level. Thereby, a sustained increase in real output growth is maintained both by the endogenously allocative and the X- efficiency conditions of the money- real economy interrelationships.
We can now write down the complete form of the money-real economy relationship in the light of the simulative well-being goal of the knowledge-centered worldview of Islamic political economy. Because of the nonlinear aggregation due to interaction and relational complementarity that are embodied in the well-being function, we take it in the multiplicative form denoted by intersection Çjkl over j variables interacting across (k,l)-systems.
Simulate {q} W(q) = Çjkl Xjklaj, (16)
k, l = 1,2 are the money and economy as the two interactive and co-determining systems. Xjkl = {M1,M2,p1,p2,y1,y2} is the vector of various variables pertaining to markets that are interconnected with the micro-money flows. Because of the knowledge-inducing process of the shuratic kind all variables including the aj coefficients are q-induced. We have taken this q-value in the limiting form.
The recursive relations according to the circular causation system are,
M1 = f1 (M2,p1,p2,y1,y2) (17)
M2 = f2(M1,p1,p2,y1,y2) (18)
p1 = f3(M1,M2,p2,y1,y2) (19)
p2 = f4(M1,M2,p1,y1,y2) (20)
y1 = f5(M1,M2,p1,p2,y2) (21)
y2 = f6(M1,M2,p1,p2,y1) (22)
q+ = f7(q,M1,M2,p1,p2,y1,y2)- (23)
All of the above variables are recursively q-induced through the IIE circular causation processes. The sign ‘+’ indicates a forward recursive value upon the lagged values of both the institutional shuratic policies and preferences and the socioeconomic variables. The recursive lag indicated by ‘-’ is shown to govern all the variables inside the bracket. All the functions denoted by f’s are nonlinear.
In a progressively transforming Islamic money-real economy complementary system the coefficients of the relationships are expected to be either positive or tending towards positive signs out of progressively weakening negative relations. This signifies the passage from a non-learning system, such as the one characterized by the neoclassical marginal substitution methodology (Shackle, 1972), to increasingly pervasive complementarity as signified by the shuratic process or equivalently the IIE-process methodology.
The above trends translate into the following analytical results. In the evolutionary life-fulfilling regimes of development promoted by the shari’ah preference changes and use of instruments selected out of discourse and extensions, pi and yi denote prices and outputs of such goods, respectively. Thereby, (piyi-cost of production) are distributed among participants in a cooperative Islamic political economy. This implies that the cost of production is also shared and no opportunity cost of production concept can therefore remain.
Spending in the production and consumption of yi at prices pi is financed by Mi. Thereby, some of the spending flows between production value and consumption value of interrelated goods and services. The equations (17)-(23) bring out this kind of interdependence. Such an interdependence follows the circular causation methodology as epistemologically derived from expressions (10) and (11).
Equations (17) and (18) are the micro-money equations for the quantity of money in circulation in multimarkets. Note that interest rates are logically ruled out in this system of relations by the absence of the opportunity cost of money and real goods and services as is otherwise expressed by their relative prices in neoclassical economic theory. Marginal substitution hypothesis is replaced by the endogenous nature of micro-money pursuing spending in interconnected multimarkets. The circular causation process in simulation by the IIE-methodology sustains the evolution of the system of diversity leading to pervasively complementary relations through the shuratic process.
In the above sense, markets are not driven by the principle of invisible hands. Rather, the interconnected multimarkets become systems of social contracts driven by the measured guidance of polity (shari’ah) in view of the goal of an ethicizing market system with preference and behavioural changes (Choudhury, 1996). The epistemological derivation of micro-money equations also points out that money-real economy interrelationships are causally linked to well-being in the Islamic political economy. This well-being criterion function is the measure of pervasively complementary relations among the critical variables. Finally, all of these are possible under the crowning episteme of tawhidi unity of knowledge both by its intrinsic nature in world-systems as well as by the guidance of shari’ah and its instruments towards realizing unity in world-systems. Herein, money and real economy complementary relations provide a significant example.
We note from the system of complementary relations (16)-(23) that well-defined circular causation exists between money and the real economy. That is to say money is truly micro in nature as it is in pursuit of financing the shari’ah recommended life-fulfilling basket of goods and services by means of specified instruments that promote ethical values and complementarity between ethical possibilities. This makes money the valuation medium for multimarket spending. Subsequently, new rounds of multimarket spending become the springboard for further quantity of micro-money in the economy.
The problem of the quantity theory equation of exchange with respect to price-money causality is now overcome. Heilbroner’s M-C-M process a la Marx is now replaced by the kind, [Commerce – Money – Commerce – Money – etc], induced by institutional guidance according to the unitary divine law of shari’ah (q-values). Besides, since there can be no possible q-values at the macroeconomic level where decision-making, preference formation and behaviour are all absent, therefore, the knowledge-induced [Commerce – Money – Commerce – Money – etc]-process has meaning only at the microeconomic level. Money is thus micro-money and spending is interactively relational across multimarkets in the Islamic theory of money and real economy linkages.
The concept of demand and supply of money now loses significance. There is simply a quantity of currency as money available from the central authority to match up a reflective spending demand in shari’ah-recommended life-fulfilling goods and services. Our old ideas of money as medium of exchange and store of values lose meaning in this case. Since money has no market of its own it cannot be a commodity or a factor of production. Money has no intrinsic use price. It simply comes into use after the demand signals are provided from the spending side. Consequently, money stock cannot be formed by savings in such a micro-money and real transactions linkages. Monetary policies in this system cannot logically promote savings. Interest-based instruments and speculation cannot occur because of the absence of short-term rates of interest. Spending is a source for making production a diversity resulting in the ultimate reduction of cost of production by means of risk and product diversification. Uncertainty is thereby controlled and the spending variable causes the growth of money-real economy variables. Stabilization and sustainability are realized by the principal action of the circular social causation of the knowledge-induced process model across the ‘wider field of valuation’ in dynamic life-fulfilling regimes of development (Myrdal, 1968; Choudhury, 1997).
Section 4: From methodology to methods: contrasting the Islamic micro-money and real economy simulation from the mainstream economic methods
Apart from the causality and aggregation problems of the equation of exchange in the quantity theory of money and the consequential inability to use this equation for developing the idea of micro-money, there are other problems that fly from the epistemological side of this body of theory into its methods. We will consider one such other problem below.
Equation (1) is revisited in the form,
MV = Py, (24)
Giving, gM + gV = gP + gy. (25)
Now consider the micro-money version of equation (1). Can this be put in the form (25)? No. Consequently, the method of quantity theory of money in the disaggregate exchange equation does no match up the growth rates of money and of the velocity of money circulation with the growth rate of spending in multimarkets. One cannot therefore either aggregate from (1) into (24) or disaggregate from (24) to (1), no matter how appealing this would appear in the linear form. Consequently, we cannot derive micro-money stability and well-being results from the methodical conclusion as shown above.
The same question when inquired in the IIE-version of micro-money and real economy relations yields the following result: There is no concept of macroeconomic disaggregation of a stock of money M into its micro-monies equating to multimarket spending. It is possible only to aggregate the micro-monies by the spending formula in particular markets. However, this would not yield the concept of the macroeconomic money stock.
For the ith multimarket,
Mi = Spi (spending in ith multimarket) = piyi + rici. (26)
The intrinsic q-value is subsumed.
Besides, rici = piyi-pi, (27)
where, ri denotes quantity of productive factors, ci denotes unit cost of factor use.
Thereby, Mi = 2piyi-pi. (28)
Since pi is a proxy for well-being at the level of the firm or market, it is a simulated target function attaining a given value at the end of every completed shuratic process, as explained earlier. This kind of simulation is shown in figure 1. We can differentiate the variables in (28) primarily with respect to q-values. The resulting equation is,
gMi = gpi + gyi (29)
This is the result corresponding to rates of change with respect to the changes in q-values in any given completion of process according to the circular causation model explained in expression (6) or (10). With respect to both time variable and q-values we must invoke the epistemological meaning that time is created by knowledge and only momentarily they are the same. This is authenticated by the Hadith al-Qudsi (divinely inspired Prophetic saying) in which Allah declares, “Sons of Adam inveigh against [the vicissitudes] of Time, and I am Time, in my hand is the night and day.”(Al-Bukhari & Muslim). Expression (29) can thus be aggregated to maintain the equivalence between total micro-money and multimarket spending.
Methodological differences emanating from the results of the Islamic and the wertfrei concepts on micro-money and real economy linkages go back to the epistemological roots of these two disparate systems. The episteme of all non-Islamic worldviews leaves out the fundamental portion of the unity of divine knowledge (tawhid) invoked in the epistemological outlook of the Islamic worldview. This portion is given by the causality, [W ®F {F} ®f* {F*} ®f1 {q} ®f2] in expression (6). Consequently, as we have found, the macro and the micro become two disparate dualism of the otherwise unified socio-scientific reality. Such a dualism plays itself out in terms of micro-money as with the neoclassical marginalist philosophy in all socio-scientific constructions. The economic thought of Schumpeter (1961) and Hayek (1990 reprint) dwelled on such an open-ended evolutionary system, though they too would like to see convergence in their dialectical systems. Yet neo-liberalism could not afford them with anything else but the marginalist hypothesis of the neo-classical notion of goods and money as competing commodities.
According to figure 1 the circular causation expressed in the q-induced simulation causes two kinds of W converging to W* and evolving onwards. Either such W and W* are optimal targets, in which case steady-state equilibrium for all the variables is configured and the novelty contributed by learning is over, or all the variables and the W and W* functions are randomly evolutionary by competition yielding no sustained convergence. Figure 1 is explained below.
Let such limiting values of
([qikl],[X
ikl(qikl)])
be denoted by ([qkl*],[X
kl*(qkl*)]).
The simulation path of the well-being function and knowledge-induced variables
can now be depicted in figure1.
Figure 1: The
simulation path of the wellbeing function and the knowledge induced variables
The arrows in figure1 show the simulative direction of the convergence of the knowledge-flows, knowledge-induced variables and the resulting simulated well-being function. This whole process of convergence marks the completion of a given shuratic process in the IIE-system.
In simplified form, (q*1kl, X*1kl) would be substituted for stage 1 in the interaction given by the expression (11). The resulting simulated well-being function would then be W*(q*1kl, X*1kl) for process 1 at the point just prior to the commencement of the second evolutionary process and so on in expression (11). The evaluation of the social well-being function carried out by means of the simulation method in such a perspective generates random fields of knowledge-flows caused by the fundamental nature of the unity-in-diversity of the knowledge-induced domain of socio-scientific possibilities. But these entities remain interrelated more meaningfully by complex and non-linear but monotonic functional relations determined by discoursed limiting knowledge-flows over random fields. Along with such random fields of limiting knowledge-flows, their knowledge-induced forms and the resulting compounded well-being functions, come about conditional probability distributions. These are topics of a more technical nature and are taken up elsewhere (Choudhury & Korvin, 2002; Vanmarcke, 1988; Pollock, 1990).
Section 5: Linking up micro-money with the gold
standard (Dinar) in the 100 per cent reserve requirement monetary system
Despite the complementary relationship between micro-money and real economic transactions guided by shari’ah there must exist the monetary numeraire for this system, such that the money valuation of real transactions can be done in a way that does not bring about debasement of the currency in terms of which micro-money will be transacted. The Prophet Muhammad’s recommendation to adopt gold as the medium of monetary valuation was practiced for quite some time in the Muslim World until it was replaced by the Egyptian Mamluk dynasty with copper coins. This caused hyper-inflation to occur in Mamluk Egypt at the time (Allouche, 1994). It was mentioned at the beginning of this paper that gold has proven to be the most stable precious metal over long time periods. The gold standard was taken away because of the capitalists’ gregarious desire to delink banking from the free market exchange system for their ulterior motives of earning surpluses through interest on paper money (Carmack & Still, 1998).
A return to the gold standard in any future Islamic monetary union within the purview of an Islamic common market will require economic integration defined by market-trade-growth-money interaction. Questions of economic stability and social well-being will be predominant in this process. The shuratic process explained in this paper would have to become the guidance forum for discourse and implementation of policies and instruments for ummatic harmonization and unity. The gold standard will again play its important role as the monetary numeraire. But what will be the modus operandi for introducing this great change in the midst of today’s entrenched fractional reserve requirement monetary system in which paper money overwhelms the gold standard?
Two institutional changes must come about along with serious analytical basis and the shuratic process methodology on changing to a 100 per cent reserve requirement monetary system by the common weal of Muslim nations. What we are recommending here does not take into account the immense transformation consequences along Islamic lines that this will involve and create. We leave these massive details to be determined by the shuratic process along its evolutionary learning trajectory as expressed by the string relation (6). We restrict our focus here simply to the configuration of the 100 per cent reserve requirement monetary system, its relationship with the gold standard, and thereby, the emergence of micro-money and real economy linkages.
100 per cent reserve requirement monetary system briefly
Figure 2 explains briefly the meaning of the 100 per cent reserve requirement monetary system. The Central Bank A has authority only to discourse with the Islamic Banks B as financial intermediaries to determine the quantity of currency that must be created to finance the demand of the clientele at the Islamic Banking outlets. The Islamic banking clientele at B is denoted by C. In this figure there is no independence of B in creating money as promissory notes. There is no prime-rate discounting between A and B. Asset valuation occurs between A and B by analytical methods in compliance with the shari’ah rules on the valuation of real assets in terms of the stock of micro-money that must flow from A to C through B. C holds cashable vouchers issued by A at B, whereby fractional amounts of this voucher can be liquidated and excess amounts withheld at A. The voucher denominates an exact loanable amount to the holder in accordance with his credit worthiness that would be reflected in the personal ledger with B.
In case of excess demand for spending funds the borrower is introduced to a mudarib fund (mutual fund) in which a joint venture comes about for the project for which the excess demand for funds will be spent. In this way, only marginal additional money needs to be created as the fund become pooled and the cost of the fund is transferred to the cost-sharing processes between the mudaribs. B itself is a co-financing and overseeing mudarib in this multilateral relation within the market economy relationship. Joint ventures along mudarabah, musharakah and trade-related lines must pass their shari’ah feasibility at A and B.
The same principle will hold for lending without collateral in the case of microcredit and microenterprise development. A case to this effect would be the Islamic alternative for the Grameen Bank of Bangladesh (Hassan & Renteria-Guerrero, 1997). One can also have firms employing marginal groups of workers to establish development funds for the financing of exigency for the marginal worker needs in times of company hardship facing the firms. Such development funds would offset the claim for additional funds from B (Choudhury & Hassan, forthcoming). Hassan (1999) has also pointed out a detailed list of real economic activity that Islamic Bank Bangladesh engages in while undertaking microcredit and microenterprise schemes.
Reserves of A now comprise all the deposits accruing from the deposits made at A by C through spending in the real economy. Every transacting agent has thus a personal reserve ledger in the computerized system that would be interactively linked between A and B. Any proportionate retention of the banking voucher made available to clientele is also deposited in the A reserves. B has thus no ‘excess reserve’ except service charges appearing as percentages of transactions made by C plus the commissions from A. Banking clientele receive productive returns from the Islamic spending outlets.
A is the overseer of the quantity of currency to be circulated in accordance with the spending needs at C and their feasibility as advised by B to A. The income of A in all this is generated from the revenue net of cost of the sale of gold as the numeraire and the volume of such currency made available in accordance with real sectoral demand. This revenue flows from the real economy where the government enters into joint ventures with the private sector in the production and management of gold bullions.
At a time and over a region where gold is scarce, the gold price will be high. The gold-backed currency will then be denominated high values and a number of smaller denominations will be required for smaller scale transactions. In the end it is not necessary to buy and sell gold once a stock has been stored in A. The stock circulates between A, B and C in accordance with the denominated voucher values. Excess demand and lending without collateral would call for further gold production for which A would take advance production stocks and would get back the revenue net of cost of production and management of such additional stocks of gold from corresponding joint venture schemes in gold projects with the private sector.
In times of obligation to pay off international debts outstanding, A would have to call for joint ventures in debt-equity swaps or hold additional currency stock to pay off such debts. But as the debt is being paid down A is also entrusted as a development organization with the overseeing of the Islamic transformation process. Such a transformation calls for adoption of a dynamic life-fulfilling regime of change and effective risk and production diversification by the use of Islamic financing instruments that revolve around co-operative mechanism. A, B and C have thus entered into an interactive phase in the total overseeing process of Islamic transformation and its reciprocal response. Such is the shuratic process now linked to the broader echelons of similar kinds of shuratic processes in the ummatic system. Such extensions of the shuratic system would cause linkages between the banking, market and trade system of the ummah.
The shuratic process between A, B and C and its extension by the ummatic transformation would give rise to a massive system of spending-linked mobilization of public and private sector resources and wealth into real sectoral activities using shari’ah instruments. Such a mobilization of resources is what is meant as the negation of savings and its replacement by the activity of spending that pursues not interest rates but real rates of returns. The analytics of the money-real economy linkages have shown us in this paper that the discoursed and simulated system would attain economic stability and sustainability with the enhancement of risk and product diversification. A truly participatory economy evolves toward its ummatic realization. Money, markets, trade and project financing now become carriers of that change. This is the function of micro-money in relation to market activities according to shari’ah rules. It is an idea that combines the 100 per cent reserve requirement monetary system as an institution with the multimarkets of the ummah and mobilizes the instruments of micro-money and shari’ah rules to connect with real transactions.
A {SMi,p,y,ÇPref}[q]
Shuratic
process
B C
{SMi,pi,yi,ÇPref }[q] {Mi,pi,yi, ÇPref }[q]
National and ummatic
Shuratic
processes
Figure 2: Resource mobilization in 100 per cent reserve requirement monetary system
Note in figure 2 how specific forms of the critical variables of the simulative system (16)-(23) concern A, B and C in slightly different ways. A is concerned with the general level of prices and output based on the micro-money relationship with multimarket prices and outputs. B is concerned with the total quantity of money, with the entry of such micro-money with specific clientele-ledger and with the prevailing conditions of prices and outputs in each multimarket. These aspects are necessary to launch effective development programs in co-operation with the central bank and markets. C is specifically concerned with specific multimarket conditions that inherently interact with each other. The overall interactive, integrative and evolutionary process inherent in the cumulative experience of the shuratic process is realized by participatory preferences and the overall knowledge-induction. In the end, the money-market-institutional shuratic process revolving around A, B and C is interconnected with the shuratic process of the broader national and ummatic order within a transforming ummah moving towards a 100 per cent reserve requirement monetary system with the gold standard.
Section 6: Concepts of nonmonetary numeraire
in money-real economy relations
In recent times three alternative numeraire and micro-money concepts have been suggested in the literature. Yaeger (1997 reprint pp. 412-13) writes,
Government would be banished from any role in the monetary system other than that of defining unit of account or numeraire. We envisage a unit defined by a bundle of goods and services comprehensive enough for the general level of prices quoted in it to be practically steady. Merely by conducting its own accounting and transactions in this Unit – we tentatively so name it, with a capital U – the government would give private parties a strong incentive to adopt the same Unit.”
Yaeger goes on,
No longer would the size of the numeraire, our Unit, be determined by the supply of and demand for any medium of exchange. The Unit would be defined by goods and services having supplies and demands of an almost entirely nonmonetary character.
Choudhury (1992) suggested an ethical basket of goods that is used by most consumers and producers to be treated as the monetary numeraire. Yet such a choice of the basic needs basket being dynamic in nature in the evolutionary trajectory of the shuratic process, it will have to be set by shuratic discourse over time as the money-real economy interrelationship firms up and the economy develops progressively. The stability and sustainability of this change along with the price elastic nature of the ethicized basket of basic needs will maintain prices stable over time.
Korten (1999) suggested community currency money as micro-money for transactional purposes. He recommended community currency in order to contain the flow of such currency within the community and perform productive functions. He mentions about fifteen hundred communities around the world that have issued their own currencies and have flourished by so integrating.
Nonmonetary numeraire choice for purposes of fixing the smaller denominational units of the gold-backed currency was indeed practiced by the Prophet Muhammad. The Prophet used weighted measures of barley, wheat and other grains to assign certain smaller denominational values such as danaq and mithqal to coins lower in value than the Dinar (Allouche, 1994). However, in every case the Prophet recommended associating market values with measured baskets in terms of the value of the gold allocated in the valuation of such smaller units. Counter trade was not recommended. Currency money was thus recommended as the means for valuation of real exchange and the Dinar was associated with the real exchange in various denominational units so as to assign a non-debased value to the market exchange and to keep such a value stable over time.
Section 7: Policy Conclusion
Today, in the eve of a post-modernist epoch that is dawning before us, the old socio-scientific order is up for questioning and rejection in many ways. This is giving way to new epistemological roots of intellectual inquiry, discovery and innovative applications. The Muslim World today is to assess its station in this spectrum of novelty according to her own episteme of knowledge and life. Thus far she has failed miserably in all fronts and the aftermath of a global political economy of disorder and fragmentation is upon her.
Among the many issues that assume center stage in new perspectives of the globalization scene for the Muslim World, that which we refer to here as ummatic transformation, will be the nature of money, monetary policy and institutions and their relationship with the real economic transactional basis of sustainable development. In this regard, keeping in view the micro-money and real economic interrelationships, the automatic stabilization, sustainability and well-being effects of such an interactive, integrative and dynamically evolutionary order and the challenging new methodology and methods premised on the unity of tawhidi worldview, the ensuing critique of the mainstream economic order in this paper has opened up new dimensions for serious investigation.
To attain such an ummatic transformation we offer the following policy recommendations that emanate from this study.
1. The OIC with its membership is to galvanize the intellectuals, practitioners, public and private sectors and governments to establish a think tank or center/institute enabling discourse on the ways and means of putting into action a human resource development program (Choudhury & Korvin, 2001) that would develop the pragmatic understanding of the shuratic process of decision-making and put that into action.
2. The Human Resource Development Center on the understanding and application of the shuratic process methodology for ummatic change in all fronts but with a focus on the interactive and unifying dynamic relations between trade, development and real money, must be prominent. This calls for a policy on getting the banking systems of the Muslim World to enact a program that will incrementally change the existing banking relations based on fractional reserve requirements into a 100 per cent reserve requirement monetary system with the backing of the gold standard. This monetary policy change calls for a program of establishing a monetary system that looks at the function of micro-money in terms of its direct relationship with real economic transactions. Thus all the asset valuation methods are to be changed into this kind of forward overlapping intergenerational relationship of the real linkages. Trade and development are then automatically linked up with the use of endogenous money in promoting merchandise trade and capital that have linkages directly with real sectoral activities rather than with speculative portfolio investments (Choudhury, 1998; 2001).
3. The banking community along with the national decision-makers, Muslim intellectuals and private sector practitioners are to assign a program promoting linkages between money and the real economic sectors and markets within the Muslim World over a stipulated period of time, within which a reasonable transformation into the endogenous monetary system with 100 per cent reserve requirement monetary system would be realized. During this process of change growing linkages between effective sectors and activities should be subjected to the trading and developmental patterns on the basis of the on-going monetary transformation.
4. The Muslim World should then be developing a regional trading bloc of the Muslim countries that would ultimately enact a common monetary transformation based on 100 per cent reserve requirement with the gold standard. This would cause the exchange rates and the common tariff value of the Islamic customs union to be based on the economic and social productivity of the integrating economies and in view of their complementary resource endowments. Thus the exchange-rate setting in such a case of the 100 per cent reserve requirement monetary system would be converted into a productivity driven indicator rather than be determined by a monetary policy of the fractional reserve requirement system as the latter is conventionally treated exogenously in exchange-rate and interest-rate mechanisms.
5. Islamic banks, other banks and financing development intermediaries in concert with the national planning departments are to establish programs to jointly fund such complementary projects as an accepted focus of trade and development in the Muslim World. The Islamic Development Bank, the Islamic Chamber of Commerce and the Statistical, Economic and Social Research and Training Center for Islamic Countries (SESRTCIC) must together enable the development of such linkage programs. Such programs for developing and executing complementary projects should aim at vitalizing the private sector in co-ordination with the public sector and governments toward facilitating such developments that build on programs of linkages along lines of the dynamic life-fulfilling needs of development (Huq, 1997).
6. The dynamic basic needs regimes of development would correspondingly define the development and trade patterns of the Muslim bloc. This kind of dynamic basic needs regime vis-a-vis its linked manufacturing/service sectors would be a good sign in capturing today’s global trend towards green industry and to keep the gaze of technological transformation on its appropriateness in this age of ‘ecological revolution’ (Korten, 1990). The commodity sector would then realize improving terms of trade, which is an important pre-condition for establishing the complementary relations between economic efficiency and distributive equity and between trade and development with the 100 per cent use of money in real economic activities.
7. The financing modes of the Islamic transformation process must of course be based on co-operative joint ventures (Choudhury, 2000b). Mudarabah and Musharakah instruments cannot continue to be understood simply as the financing instruments for specific project financing alone as they presently are. Rather, their broader meaning and effectiveness are to be realized within the foundational meaning of Islamic socioeconomic co-operation. M&M must thus be changed into policy instruments by the financial sector in concert with the central and commercial banks and the planning departments of members of the OIC. The same M&M instruments would determine the co-operative character of all other Islamic trade instruments and secondary financial instruments. This transformation can be realized through the use of a 100 per cent reserve requirement monetary system in determining the productivity driven values of exchange rates and common tariffs outside an integrating Muslim World.
8. In every area of institutional and policy changes recommended above the OIC with her sister organizations such as the IDB with the Islamic Research and Training Institute, Islamic Chamber of Commerce, Islamic Corporation for the Development
of the Private Sector and SESRTCIC with its COMCEC must play catalytic roles in collaboration with the governments, public sector, private sector and development financing organizations of the OIC membership. The shuratic process model of ummatic change must become the human resource foundation (epistemology) for guiding the progressive ummatic transformation. The progress of the Islamic transformation in the years to come would then see the effective interactive, integrative and dynamic evolution of the echelons of interlinked shuratic processes and their complementary relations in terms of policies, programs and economic transactions on all fronts. This is the essence of the complementary shuratic processes of the ummah. The OIC would then need to become the ummatic governing shura that connects through circular causation with the hierarchies of micro-shuras through feedback in the ummah.
9. The centers/institutes implied above for facilitating the shuratic transformation in the areas of trade, development, money and the real economy vis-a-vis the central role of human resource development in all of these, respecting the understanding of the shuratic process in action, can be housed in IRTI and SESRTCIC or they can be launched in major Islamic universities.
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