COMPARATIVE ECONOMIC THEORY OCCIDENTAL AND ISLAMIC PERSPECTIVES

COMPARATIVE ECONOMIC THEORY OCCIDENTAL AND ISLAMIC PERSPECTIVES

by

Masudul Alam Choudhury

II1II... •

• , SPRINGER SCIENCE+BUSINESS MEDIA, LLC

Library of Congress Cataioging-in-Publication Data

Choudhury, Masudul Alam, 1948-Comparative economic theory : Occidental and Islamic Perspectives

/ by Masudul Alam Choudhury. P. cm.

Includes bibliographical references and index. ISBN 978-1-4419-5097-0 ISBN 978-1-4757-4814-7 (eBook) DOl 10.1007/978-1-4757-4814-7

l. Economics-Islamic countries. 2. Economics--Religious aspects--Islam. 3. Comparative economics. I. Title. HB 126.4.C488 1999 330' .091T671--dc21 99-37132

Copyright CCl 1999 by Springer Science+Business Media New York Originally published by Kluwer Academic Publishers in 1999 Softcover reprint of the hardcover 18t edition 1999

CIP

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, mechanical, photo-copying, recording, or otherwise, without the prior written permission of the publisher, Springer Science+Business Media, LLC.

This book is dedicated to my youngest son, Naba Choudhury, who at the present age of nine

is a self-educated computer wiz in our family.

TABLE OF CONTENTS

ACKNOWLEDGMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. xiii

INTRODUCTION ................................••.......... xv

I COMPARATIVE POLITICAL ECONOMY: METHODOLOGICAL QUESTIONS

CHAPTER 1: NEW VISIONS:THE FUTURE GLOBAL ORDER ..... 3

CHAPTER 2: THE PROCESS CENTRED WORLD VIEW ......... 21

CHAPTER 3: GLOBALLY INTERACTIVE SYSTEMS ............ 27

CHAPTER 4: FROM ECONOMICS TO POLITICAL ECONOMY: A STUDY OF METHODS ......................... 55

II MICROECONOMIC PERSPECTIVES WITH POSTSCRIPTS

CHAPTER 5: CONSUMER DEMAND ......................... 81

CHAPTER 6: CONSUMER UTILITY FUNCTION .•............. 101

CHAPTER 7: PRICING THEORY OF THE FIRM IN PERFECT COMPETITION .............................. 115

CHAPTER 8: PRODUCTION FUNCTION ..................... 129

CHAPTER 9: MONOPOLY AND IMPERFECT COMPETITION .... 145

CHAPTER 10: MARKET FAILURE DUE TO PUBLIC GOODS AND EXTERNALITIES ............................ 161

viii Table of Contents

III MACROECONOMIC PERSPECTIVES WITH POSTSCRIPTS

CHAPTER 11: MACROECONOMICS AND ECONOMIC EQUILIBRIUM ...................•.........•. 175

CHAPTER 12: DISTRIBUTION OF INCOME ................... 195

CHAPTER 13: GENERATION OF NATIONAL OUTPUT ....•..... 211

CHAPTER 14: ECONOMIC GROWTH .......••.•.•........... 225

CHAPTER 15: SAVING AND CONSUMPTION FUNCTIONS •...•. 235

CHAPTER 16: INVESTMENT FUNCTION •.•.......•..•....... 253

CHAPTER 17: DIFFERENT FORMS OF MACROECONOMIC EQUILIBRIUM ............................... 265

CHAPTER 18: THE COMPLETE GENERAL EQUILIBRIUM MODEL •••.•...........................•... 277

CHAPTER 19: MONEY AND MACROECONOMICS •.•.........• 293

IV POSTSCRIPT

CHAPTER 20: REFUTATION OF MARX'S DIALECTICAL PROBLEM ...........•...•.......•.......... 317

CHAPTER 21: METHODOLOGICAL CONCLUSION •........... 337

SUBJECT INDEX .......•••.••..........................•... 357

Figure 2.1:

Figure 3.1: Figure 3.2: Figure 3.3: Figure 3.4: Figure 3.5:

Figure 4.1: Figure 4.2: Figure 4.3: Figure 5.1: Figure 5.2: Figure 5.3: Figure 5.4: Figure 5.5: Figure 5.6: Figure 6.1: Figure 6.2: Figure 6.3: Figure 6.4: Figure 6.5: Figure 6.6: Figure 6.7: Figure 6.8: Figure 7.1: Figure 7.2: Figure 7.3: Figure 7.4: Figure 7.5: Figure 7.6:

Figure 7.7:

Figure 7.8: Figure 8.1: Figure 8.2: Figure 8.3: Figure 8.4: Figure 8.5: Figure 8.6: Figure 8.7: Figure 8.8: Figure 8.9: Figure 9.1: Figure 9.2: Figure 9.3: Figure 9.4:

LIST OF FIGURES

Tripartite Relationship, Structural Dualism and Endogeneity of Structural Dualism ................................................ 22 Endogenous Characterization of Endogenous World-Systems ...... 33 Knowledge-Induced Cognitive Forms ........................ 42 Inter-Systemic Strings of Relationships in the Tawhidi World View. 43 Proving the Inter-Systemic Interrelationships. . . . . . . . . . . . . . . . . .. 43 Contrasting the Shuratic Non-Linear World-System with the Linear World-System of Causal Interrelationships ............... 50 Economic Modelling ..................................... 67 Plot of Demand Relation from Survey Results . . . . . . . . . . . . . . . . .. 70 An Extended Perspective of Economics . . . . . . . . . . . . . . . . . . . . . .. 72 Demand Curves ......................................... 87 Shifts in Demand Curves .................................. 89 Shifts in the Demand Curves for Substitutes and Complements .... 90 Supply Curves ........................................... 92 Economic Implications of Elastic and Inelastic Demand Curves .... 94 Shifts in the Supply Curves ................................ 95 Marginal Utility and Diminishing Marginal Utility of Consumption 102 Indifference Curves ..................................... 106 Substitution Effect ...................................... 106 Income Effect .......... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 107 Income and Substitution Effects . . . . . . . . . . . . . . . . . . . . . . . . . . .. 108 Marginal Utility and Consumer Demand ..................... 109 Market Demand Curve ................................... 110 Market Equilibrium. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 111 Shapes of Various Cost Curves ............................ 117 Total Revenue, Total Cost and Profit . . . . . . . . . . . . . . . . . . . . . . .. 117 Shapes of Average Cost Curves and the Optimal Output . . . . . . . .. 119 Construction ofthe Average and Marginal Cost Curves ......... 120 Pricing of Output in Perfect Competition ..................... 122 Long-Run Average Cost Curves as a Geometrical Envelope of the Short-Run Average Cost Curves ............................ 123 Industry Supply Curve Influencing Firm's Output Pricing in Long-Run Adjustment ................................... 123 Interrelating Efficiency Conditions. . . . . . . . . . . . . . . . . . . . . . . . .. 125 Production Possibility Curve .............................. 131 Isoquant and Iso-Cost Line. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 133 Shifts in the Productivity Curve and Production Possibility Curve . 134 Constant Returns to Scale and Production Isoquants ............ 136 Increasing Returns to Scale ................................ 137 Decreasing Returns to Scale ............................. " 138 Short-Run and Long-Run Marginal Cost Curves . . . . . . . . . . . . . .. 139 Edgeworth-Bowley Box: Resource Allocation ............... " 142 Knowledge-Induced Trajectory of Resource Allocation .......... 143 Effect of Advertising on the Demand Curve of a Monopoly ...... 146 Monopoly Pricing of Output. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 149 Regulated Monopoly Output and Pricing . . . . . . . . . . . . . . . . . . . .. 149 Price Discrimination Monopoly ............................ 151

x

Figure 9.5: Figure 9.6: Figure 9.7: Figure 10.1: Figure 10.2: Figure 10.3:

Figure 10.4: Figure 10.5: Figure 10.6: Figure 10.7: Figure 11.1: Figure 11.2: Figure 11.3:

Figure 11.4: Figure 11.5:

Figure 11.6:

Figure 11.7: Figure 12.1: Figure 12.2: Figure 12.3: Figure 12.4: Figure 12.5: Figure 12.6: Figure 12.7: Figure 12.8: Figure l3.1: Figure l3.2: Figure l3.3: Figure l3.4: Figure 14.1: Figure 14.2: Figure 14.3: Figure 14.4: Figure 15.1: Figure 15.2: Figure 15.3: Figure 15.4: Figure 15.5: Figure 15.6:

Figure 16.1: Figure 16.2: Figure 17.1: Figure 17.2: Figure 17.3:

List of Figures

Pricing Conditions in the Situation of Profit .................. 152 Pricing by Means ofthe Kinked Demand Curve for Oligopoly .... 154 Pricing Conditions for the Cartel or Merger . . . . . . . . . . . . . . . . . .. 156 Equilibrium in Cobweb Models of Price and Quantity ........... 162 Explosive Demand Expectations Affecting Prices and Quantities . 163 Price decline Under Declining Demand Expectation: Downward Price Spiral ............................................ 164 Economic Regulation of Pollution .......................... 166 Transfer of Costs in Economic Regulation of Pollution .......... 167 Marginal Net Social Cost and Marginal Net Social Benefit ....... 168 Non-Pricing Rationing of Goods ........................... 170 Typical Interrelationships in a Macroeconomic System . . . . . . . . .. 177 Resource Allocation Using Indifference Curve Analysis . . . . . . . .. 179 Schematic Interrelationship Among the Principle Activities of the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 182 Circular Flow of Goods and Services in the Monetized Economy .. 183 Economic Equilibrium Using Market Clearance and Circular Flow of Goods and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 186 Price Formation in Terms of Marginal Utility of Money and the Relationship With the Consumer Demand Curve . . . . . . . . . . . . . .. 188 Circular Flow of Goods and Services in the Open Economy ...... 189 Schematic Diagram for Derived Demand . . . . . . . . . . . . . . . . . . . .. 197 Aggregation of the Derived Demand Schedule ................ 198 Backward Bending Supply Curve of Labour .................. 199 Wage-Related Labour Market Adjustment Between Regions ..... 201 Allocation of Savings and the Saving Function ................ 203 Rents and Quasi Rents ................................... 204 Earnings Profile and Human Capital Theory .................. 207 The Encouraged Worker Hypothesis and the Wage Movement .... 207 GNP and the Circular Flow of Goods and Services in the Economy 212 Factor Cost and Intermediate Cost .......................... 213 Various National Products and Equivalence of GNP Accounting .. 217 Supply Equation for GNP and Perpetual Economic Equilibrium . .. 218 Labour-Augmenting Technological Change ................... 227 Capital-Augmenting Technological Change ................... 228 Equally Labour-Capital Augmenting Technological Change ...... 229 Collection and Distribution of Taxes in the Economy ........... 231 Resource Flows in the Form of Savings in the Economy ......... 237 Flows and Transfers in the Economy ........................ 239 Life Cycle of Output Movements in the Economy . . . . . . . . . . . . .. 242 Nature ofthe Consumption Function ........... . . . . . . . . . . . .. 244 Form ofthe Estimated Consumption Function ................. 246 Nature of Intertemporal Consumption Function According to Various Income Hypotheses ............................... 250 Income Profile with Multiplier and De-Multiplier .............. 255 Marginal Efficiency of Capital and Investment ................ 261 Macroeconomic Equilibrium with GNP=GNE . . . . . . . . . . . . . . . .. 266 Construction ofthe Aggregate Demand Curve. . . . . . . . . . . . . . . .. 267 Macroeconomic Equilibrium, AD=AS ....................... 268

List of Figures xi

Figure 17.4: Figure 17.5: Figure 17.6:

Figure 17.7:

Figure 18.1: Figure 18.2: Figure 18.3: Figure 18.4: Figure 18.5:

Figure 18.6: Figure 18.7: Figure 18.8: Figure 18.9: Figure 18.10: Figure 19.1: Figure 19.2: Figure 19.3: Figure 19.4: Figure 19.5: Figure 19.6: Figure 19.7: Figure 19.8: Figure 19.9:

Figure 20.1:

Figure 20.2:

Figure 20.3a:

Figure 20.3b:

Figure 20.4:

Figure 20.5:

Macroeconomic Equilibrium in Terms of Leakages and Injections. 271 Establishing Full-Employment Level of Income by Inducing MPS . 272 Establishing Full-Employment Equilibrium by Means of Aggregate Demand Stimulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 273 Economic Equilibrium Using the Consumption and Saving Functions ............................................. 274 Labour Market Equilibrium under Perfect Competition . . . . . . . . .. 278 Product Market Equilibrium under Perfect Competition ......... 279 The Investment Curve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 180 The Expenditure Sector Curve ............................. 281 The Shapes ofthe Aggregate Demand and Aggregate Supply Curves ................................................ 284 Demand-Pull Inflation ................................... 285 Cost-Push Inflation ...................................... 286 Expectationary Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 287 Inflationary and Deflationary Demand Gaps .................. 288 Investment and Saving Curves in the Islamic Political Economy. .. 289 A Tripartite Arrangement for Monetary Transaction ............ 294 Holding of Cash Balances ................................ 301 Transaction Demand for Money . . . . . . . . . . . . . . . . . . . . . . . . . . .. 303 The Speculative and Transaction Demand for Money ........... 304 The Total Demand for Money ............................. 305 Liquidity Preference Function for Money ..................... 306 The LM-Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307 General Economic Equilibrium with LM-Schedule Shifting ...... 308 Integrating the Quantity Theory of Money with Keynesian Theory of Money .............................................. 311 Causal Interrelationships of Diversity and Complementarity in Tawhidi World View: the Shuratic Process ................. 323

Transformation ofInputs into Outputs at Entry Points in Marx's Dialectical Analysis .............................................. 325 Forward and Backward Composite Mappings among Knowledge-Flows and Their Induced Forms ................................. 326 Inter-Meshed Mappings Showing Recursive Interrelationships in Tawhidi Systems ...................................... 326 Triangulated Interrelationships Among Knowledge-Flows and Their Induced Social Well-Being Indexes ......................... 327 Money in Marx's Circular Transformation Problem ............ 331

LIST OF TABLES

Table 4.1: Relationship between Price and Quantity Demanded in Two Sample Surveys ........................................... 69

Table 6.1: Utility Function and Indifference Curve ................. 105

Table 12.1: Regional Allocation of Labour and Wage-Labour Adjustment ....................................... 201

Table 13.1: Balance of Payments and Its Reconciliation .............. 214

Table 13.2: The GDP and GNP Relation .......................... 219

Table 13.3: The Input-Output Table for National Income Accounting ... 219

Table 19.1: A Typical Balance Sheet for the Commercial Bank (Dollar Values) ................................................. 295

Table 19.2: Expansion of Money Supply .......................... 296

Table 19.3: Transaction of Government Bonds and New Money Creation 297

Table 19.4: Money Supply and Variation in Reserve Ratio ............ 298

Table 19.5: Supply of Money Generated by Issuance of Government Bonds ............................................ 300

ACKNOWLEDGMENT

The contents of this book reflect my ideas over many years ofteaching a full six-credit course in Economic Theory to undergraduate students at the University College of Cape Breton. They also combine research materials on Islamic Political Economy in comparative perspectives, an area that I have nurtured through various research undertaking as a senior faculty of the University College of Cape Breton. These research output were disseminated widely in the international fora through my learned publications, conferences and invited lectures.

It has now been possible to include some of these research materials in this book with the help of a grant received from the Social Sciences and Humanities Research Council of Canada. My thanks are to SSHRC for giving me this unique opportunity .

For each ofthe above accomplishment, I wish to thank first the University College of Cape Breton and its School of Business of which I am a faculty member, for the constant encouragement that I have received from them in many ways. I remain most grateful to my many colleagues at UCCB for their collegeal support in this regard.

I am also thankful to UCCB, particularly its Research Evaluation Committee, for financial assistance toward conducting background library research and the preparation of the manuscript for this book. These grants were well spent.

Finally, I remain grateful to my colleagues in various universities and educational institutions around the world with whom I could discourse on various aspects of the subject matter of the budding field of Islamic Political Economy. Some of these ideas have gone into several chapters of this book.

I will cherish the contributions that I have persevered for in this work if they open up greater interests in the area of comparative political economy in which I have always shown that Islamic political economy has a distinctive paradigm to contribute.

Masudul Alam Choudhury.

INTRODUCTION

With the growing need for methodological study of polity, market and societal interactions in a fast changing world, the discipline of political economy is once again being revived. In this vast threshold of knowledge, the paradigm of Islamic political economy arose in a natural way from its own distinctive epistemological foundations. Its area is the study of the pervasively interactive, integrative and evolutionary phenomenon that arises in the domain of the socio-scientific order. Economic problems are addressed within this complex of vastly interactive knowledge fields.

This book has a few objectives in view. First, it brings to light the nature and methodology of Islamic political economy as a process oriented social political economy guided by its cardinal epistemology of Oneness of God (Divine Unity). From this premise is then derived the episteme of unification of knowledge. Upon these is developed the methodological content of an extensively interactive, integrative and evolutionary world view of political economy and a meta-theory of the socio-scientific order. Secondly, while laying out the building blocks of Islamic political economy and its much wider methodological implication for the socio-scientific order, we make a comparative study of occidental thought in the same areas. These cover the epistemology of the occidental world system in contrast to the world view of Islam in the same areas. Thereby, the important concept of a process centered system is established and its methodology and applications expounded. Third, we cover the usual topics of microeconomic and macroeconomic theory. Each of these chapters is concluded by postscripts that point to different ways of re-thinking economic and politico-economic realities within the methodology of the process oriented social economy. There are a number of questions to solve by students at both the early undergraduate levels and the more advanced levels. These include challenging questions arising from the methodology and the postscripts on Islamic political economy. Note that often we have interchangeably referred to Islamic political economy as the process oriented social political economy, because of the similar contexts between these two. Some of the questions as the advanced levels would invoke a fair deal of original thinking on the part of the student.

We conclude the book my chapters on methodology and an analytical postscript to show how the interactive, integrative and evolutionary world view of knowledge-induced systems described by the Islamic political economy presents new visions of scientific thinking.

The chapter on methods required for the study of economic theory will suffice to help the student through all sections of the book. It should be a chapter to be mastered at the outset.

The sections II and III have a bibliography to them at the end of the book. This is due to the standard materials of economic theory covered in these sections. Other chapters have their individual reference sections. These references are required because of the original nature of the materials in sections I and IV.

At the end, it is hoped that the book would have served its principal objective. That is, to expound the epistemological methodology of Islamic political economy

xvi Introduction

against the backdrop of received economic theory and political economy. It is thereby intended to bring out the new methodology of complex analysis carried out by a scientific understanding of Divine Unity and unification of knowledge.

The book should be of interest to a wide range of readers. Students and academics in the areas of comparative social systems, comparative economic systems, and comparative political economy, will find this book of particular use. By writing the book in its comparative perspectives we have made it accessible to two levels of students. In the sections on microeconomic and macroeconomic theory, undergraduates students will fmd all the topics covered in a six credit course in economics at the First Year Level. The more advanced undergraduates are then introduced to critical comparison and contrasts between mainstream economic theory and the methods of the process oriented social political economy. Other chapters of the book in the more advanced areas of political economy and philosophy of science will be helpful to graduate students.