The American Journal of Islamic Social Sciences Vol. 3, No. 2, 1986 231 The Micro-Economics Foundations of Islamic Economics: A Study In Social Economics by Masudul Alam Choudhury I. Objective of this Paper The main objective of this paper is to show the relevance of ethical or nor- mative elements in economic theory. The paper builds on the exchange mechanism of economics as the ethical basis of the social order and shows that an ethical economic system must be capable of infdtely reproducing this exchange mechanism in the rational working of the total social system through higher and higher levels of social preferences. In building up this analytical framework of ethical economics, we study the field of social economics in general and of Islamic economics in particular as a field of social economics. Through this we introduce a reconceptualiza- tion of ethical economics in terms of the fundamental microeconomic buildmg blocks. The premise of the argument therefore is that since the exchange mechanism is the instrument of transmitting ethical preferences, it is the microeconomic foundation that is capable in the first place of buildmg up the ethical economic order as a whole. The ethical macroeconomic system depends upon aggregations at the microeconomic level. 11. Introduction As Boulding mentions, economics first started off as a moral science. Adam Smith, who was ”both the Adam and the Smith of systematic economics,” was professor of moral philosophy. Even long after that, economics continued to be taught as a part of the moral sciences tripos at Cambridge University. Dr. Masudul Alam Choudhury is an Associate Professor of Economics at the University of Cape Breton in Sydney, Nova Scotia, Canada. 232 The American Journal of Islamic Social Sciences Vol. 3, No. 2, 1986 Therefore when an economist turns his questioning glance at the legacy of economics as it has advanced through time, the issue is the epistemological foundation of economics as a moral science versus its study as a social science. Since no social system can function without ethical values and since the human aspect of society looks toward progressive reinforcement of its ethical foun- dations through economics, the comprehensive definition of economics must return it to its moral-science origins while retaining the scientific methods of analysis applicable to the issues that emanate. Boulding =defines economics as the study of that part of the ”total social system which is organized through exchange and deals with exchangeables.”’ The exchange sub-system of the total social order touches or crosses over in- to the other two social subsystems, namely, the threat system and the integrative system.‘ The threat system is characterized by dictatorial or authoritarian decision-making; the integrative system is characterized by totally benevolent institutions like family, church, club, etc. The total social system comprises these three sub-systems. III. Exchange Mechanism as the Instrument of the Ethical System of Economics The exchange mechanism referred to here as the basis for a redefinition of economics both as a social science and as a moral science is also the center- piece of ethics in economics. But in order to comprehend this broader defini- tion of economic science one has to identify the central ethical elements not only with the social and moral aspects but also with the scientific aspect of economics. An ethic is here defined as the set of common values upheld by a culture or subculture. Such values can also be transcultural. The above re- definition of economics asserts that an ethic in this sense necessarily underlies the moral, social, and scientific aspects of the field of study. The set of com- monly agreed upon values defines society’s preferences with respect to economic activities like consumption, production, and redistribution. The ethics of the exchange basis of ecofxlmics also suggests the moderating role that economics plays between the purely malevolent preferences of a threat system and the purely benevolent preferences of an integrative system. Economics with its exchange system strikes the balance between these two Kenneth E. Boulding, “Economics as a Moral Science,” Hum~ist ic Society eds. John F. Glass & John R. Staude, (Pacific Palisades, Calif.: Goodyear Publishing Co. Inc., 19n). * K.E. Bouldm, Beyond Ecommics (Ann Arbor, Michigan: The University of Michigan Press, 1970). Masudul Alam Choudhury Micro-Economic Foundations 233 types of preferences by making its Own preferences reduce the conflict bet- ween each. In the best state of preferences under the exchange system of economics the system becomes value-neutral. In other words the economic system construed as a purely scientific system is incapable of reproducing the ethical basis that in the first place created the exchange system and the underlying system of social preferences. It is at this point that a reformulation of economics is necessary, so as to complete the circular loop in the economic system with ethical elements. This means that the economic system as a part of the total social system must be able to use the exchange mechanism to establish its equilibrium state and also recreate higher levels of preferences to regenerate the role of ethical values in the total social system. All this can be explained by the following diagrams. Figure 1 shows that in mainstream economics the ethical basis of the ex- change mechanism in the economic system does not reproduce itself. This is the problem of a we@& or value-free approach to economic analysis. In the social economic system, this gap is filled in by the loop as shown which indicates that the ethical basis of the exchange mechanism reproduces the ethical economic system through higher and higher levels of social preferences. Later on in this paper we show that these higher-order social preferences augment and expand the activities of production, distribution, and consumption. Figure 2 further elaborates the function of the Exchange System of economics in moderating the malevolent vs. benevolent types of preferences respectively of in the threat system and integrative system in the total social order as conceptualized by Kenneth Boulding. Note, however, that the ex- pansion of any one of these types of preferences over the other is a situation of disequilibrium in the sense of pure exchange because such a situation gives rise to the subjective imposition of one sub-system over the other. Contrariwise, the simultaneoUs expansion of the malevolent and benevolent types of preferences also leads to a situation of disequilibrium because of the subjec- tive imbalance and conflict between such preferences. The only situation of social equilibrium is associated with the simultaneous breakdown of the con- flicting types of preferences by the advance of the pure exchange system of preferences. The exchange system gains each time it expands the activities of produc- tion, and distribution, and consumption. In this way the iterated cycle of hgher level preferences reinforce the ethical basis of exchange mechanism, recreates it, and augments the economic activities in a socially desired direction. We therefore have the concepts of social balance in production, social control of production, distributive equity, and moderation in consumption. FIGURE I I 4. 4 4 Production 1 I Consumption I I Distribution p CI I I I + \ f 3f x h) L I The Exchange Framework of Ethical Economics I Equilibrium - I .- - I - - + - - - - - - - - - .- - -. - - - - -. FIGURE 2 The Working of the Exchange System in Establishing Equilibrium in the Total Social System TS - IS Disequilibrium TS - IS Equilibrium I through exchange I Economic System I Total Social System Expanding production TS: threat system IS: integrative system ES: exchange system activities under the iterated exchange mechanism I 236 The American Journal of Islamic Social Sciences Vol. 3, No. 2, 1986 IV. From Mainstream Economics to Social Economics Fortunately, it is possible to look into a rational reformulation of economic theory and policy from a holistic, ameliorative, and value-oriented viewpoint. This is the goal of Social Economics as opposed to the goal of Mainstream Economics. The latter adopts the approach of the natural sciences in addressing itself to man’s economic woes alone. Social Economics has been viewed dif- ferently by different economists during the process of its development. The underpinnings are deeply rooted in the dichotomy between the concepts of Natural Law and Positive Law. This can be traced in the economic thought of Quesnay, who clearly differentiated between these two systems of laws work- ing in the economic system.’ Schumpeter defines the concept of ‘natural law’ as the “awareness of the presence of a set of interrelated phenomena that give rise to ’problems’ fbr social analysis.” The premise of the ~ t u d law is religion, philosophy, jurisprudence, and intuition. The positive law merely reinforced the declaration of the natural law. It took the form of tools of mathematics, logic, and the deductive and policy science^.^ Later Walras viewed Social Economics as a field of inquiry intermediate between social ethics and economics. In this sense, Social Economics is a rational socio-economic study of the application of religious thought to the economic, political and social domain, calling for applied judgements and reforms. Tawney believed that Social Economics as the means of studying society should be guided by a just appreciation of spiritual ends in order to use its material resources to promoting the dignity and refinement of the individual human beings who compose it.6 McKee defines Social Economics as an “Economic inquiry that is both related in values and ready to take account of social aspects and con- sequences of behaviour extending beyond what is usually understood as ec~nomic.”~ The methodology of Social Economics can be well summarized in the words of John C. O’Brien: “The new paradigm would emphasize the impor- tance of the public interest, the idea of community. It would place particular importance on man’s quest not only for material progress but also for that ethical progress without which man’s material progress cannot even be preserv- R.J. Stephens, Social Economics: A Budding Scientific Research Programme?”, Interna- tional Journal of Social Economics, Vol. 8, No. 3, 1981. A. Gray, Ihe Devcbpment of Economic Doctrine (London: Longmans, 1%7), Ch. 4. ti J.A. Schumpeter, History of Econom’c Analysis (New York: Oxford University Press, 1%8), a. 2. R.H. Tawney, Ihe Acquisitive Sociefy (New York: Harcourt, Brace & World Inc., 1920). A.F. McKee, ?Social Economics and Social Values: I~~&m’onal Journal ofsociclr EcconOmcs, Vol. 9, No. 617, 1982. Masudul Alam Choudhury Micro-Economic Foundations 237 ed. Social economists would have no compunction therefore about making normative judgements in keeping with the traditional code of morality. Ethical considerations would not be excluded from the study of economic problems.”* Now, if this trend in economic theory is brought to bear upon mainstream economics, the result would be a new approach to economic analysis that comprehends a much wider area of social welfare analysis than the neeclassical value-neutral basis of utilitarianism. A new concept of social contract in the exchange mechanism would result. The concept of economic efficiency will change. The patterns of consumption and production menus, of income distribution, resource allocation, and product pricing will all change. A new methodological approach would have to be evolved and a different set of economic objectives maximized in order to treat the ethico-economic pro- blems of micro- and macro-economics consistently and rationally. The new paradigm of the social welfare model will emphasize a cooperative socio-economic model of development as opposed to a purely competitive equilibrium model. It would seek to optimize the efficiency-equity conditions within the milieu of a self-reliant integrated development. In this approach, human resource development, production of proper types of goods and services, expansion of complementary product needs, attainment of higher employment and productivity, increased incomes and price stabilization, and intercommunal transfer of technology, will lay down the path to a comprehen- sive well-being and prosperity, for which we may use the term ”total welfare” as a synonym. V. Social Economic Perspectives of Reformulating Economic Theory Social economics therefore involves a serious reformulation of economic theory in the mould of ethical considerations. The reformulation would have to start by trackmg dawn the entire gamut of the traditional economic assump tions, systems scope, and methodology. The beginning point muld be to refor- mulate the concept of economic rationality not in terms of maximizing in- dividual ethics-neutral utility functions, but rather in terms of economic cooperation among individuals and communities. Economic efficiency will have to be re-cast not in terms of perfect competition, but rather in terms of conditions of cooperation within a competitive market model. Consumer sovereignty and the pure profitability criterion of producing and consuming goods and services would have to be replaced by the idea of social goods * J.C. O’Brien, “Social Values, Social Goals, and Manpower,” (mimeo.), School of Business and Administrative Science, California State University at Fresno, August, 1983. 238 The American Journal of Islamic Social Sciences Vol. 3, No. 2, 1986 and services, that is, goods and services that are not only socially shared but also generate social profitability and consumption/production externalities. The pricing of the product, cost and benefit specifications, resource alloca- tion and choice of production menus would all have to be determined under competitive-cooperative conditions rather than under purely perfect competi- tion. Utility and output maximization would have to be re-oriented to inter- dependent altruistic consumption patterns with external benefits and to dif- ferentiated menus of output. Marginal analysis will have to be replaced by average productivity analysis. Indeed, average productivity would have a better approximation of income distribution across the population than the measure of marginal productivity of labour, which denotes the results of undifferen- tiated self-interest and self-motivation. In this way the role of X-efficiencies in maximizing well-being will play a singularly more important role than sheer allocative efficiencies. Welfare economics and welfare maximization, in the technical sense of well-being, will have to be figured out in terms of the optimal attainment of central social objectives, such as full employment, price stabilization, economic growth, and socio-economic development goals (income distribution, allevia- tion of poverty, squalor, e t ~ . ) . ~ The Walrasian form of general equilibrium, which caters to multi-market general equilibrium based on relative prices of consumer goods, is inappropriate in explaining general equilibrium as an ethical economic system, the reason being that prices are derived on the basis of Benthamite type utility functions. Besides, under ethical considerations on joint consumption, externalities in production, and altruistic cooperation, excess demand could remain strictly negative in all markets. Yet the supply price will not be necessarily zero in all markets!O On the macroeconomic side, too, the micro-economic foundations of price, income, and employment analysis, and of dynamic socio-economic development theory will have to be the building blocks. This would differ from the usual institutional form of aggregate analysis. In this new approach, on the macro-emnomic side the consumption function, the investment func- tion, the production function, fiscal and monetary considerations required to monitor employment, stability, growth, and socio-economic development on the consumption and production sides, must be the weighted average ag- gregation of the corresponding process going on at the micm-economic level. One agqmach taward this re-orientation of general rnam-emnomic quiliirium is to specify a social welfare maximization problem through the attainment of the critical social objectives, such as employment maximk& ‘on, price and incomes sfabiiity, economic growth and socioeconomic development as these ’ R.A. Gordon, ??K! G d @i+dl-€h&~~U (John Wdq and Sons k., W7). HM. Morishima, RWr.as’Economics (Cambridge University Press, London, 1977). Ch. 1. Masudd Alm Choudhury Micro-Economic Fouodatioas 239 emanate from ethicmxonomic considerations in the social consumption, in- vestment, and production menus. The constraints of this optbization pro- blem will be the lateral aggregation of microeconOmic consumption func- tions, and of the firms investment functions and production functions, along withtheaggqptemourceconstraints. Themonetaryandfiscalsystesrstemswwld be treated as exogenous to the system, b e i essentially treated as instruments to gear the system to its desired equilibrium in consumption and production. These new dimensions in economic theory suggest that the ethical ap- pmach to economic amlysk d d stillhaw to keep thedisciplineofeconomics as a self-contained whole in itself. Otherwise, the encroachment of foreign elements in economic theory such as through religion, philosophy, sociology, and value judgements, etc., can destroy the Eabric of any seIfansistent and welldefined domain of economic analysis as a science. The need for stan- dardizing certain assumptions for internal consistency ofthe economic &stem would be fundamental. Otherwise, the study of ethical economies will drifk away from its scientifically manageable moorings. Next will come the great importance of methodology in this scientific discipline. There is no doubt that the mathematical approach to ecoMlfnic theory has given to this discipline at least in theory, a vast predictive power and analytical precision. In the new system of Social Economics, too, the mathematical and statistical tools will have to play the major role for analyzing in an integrated way the inter-related systems of economic and ethical elements of the whole. F d y , the develop- ment of the new approach to economic theory must p d along some systematic lines. Since microeconomics would pmide the logical building block of the macro-economic system in Social Economics, the pmper direc- tion of development for Social Economic Theory wodd be the reformulation of micro-economics in the iirst place. This can then be gradually and logically extended to the field of a new macroeconomics. socialeconomicsthe~xedoesnothavetodismantlethehighlyadvanced logical structure of mainstream economics. Its challenge is reformulate many of the fundamental assumptions of mainstream economics, necessitated by the integrased treatment in the economic system of both economic and ethical elements. Next, it must develop its own analytical systems to explain the economic lat ti on ships in the ethicoeconomic system. VI. From Social Economics to Islamic Economics Islamic Economics is an example of an emerging economic system, one that is value-oriented and capable of formulating a consistent, I;ttional glrgEysis consists of the over-riding impotence of ethical consih- in the ecoMMnic ofthe ethico-economic system. 'Ib summarize, the core of Islamic ecoMlmics 240 The American Journal of Islamic Social Sciences Vol. 3, No. 2, 1986 system. Naqvi asserts that in the Islamic system of economics it is ethics, “independent of the economic conditions prevahg at any time or in any society that must guide human behaviour for the attainment of social bliss as well as spiritual salvation.” Social bliss is explained by Nqvi to mean both economic betterment and spiritual ascension as two elements of a unitary Islamic outlook on what constitutes human happiness!’ Islamic economic doctrine thus lays the foundations of a non- homoeconomic society in which individuals would interact and social rela- tionships would be established on the basis of ethical dealings thoroughly per- vading the realm of economics. The ethical d w s on which Islamic economic behaviour are founded are not arbitrary in nature. Ethical norms are generated not by majority action on the principle of voting on a given ethical issue (such as society’s consensus on abortion, poverty, humanistic education, etc.). Rather they are founded fixedly on the principles of the Qur’an and the traditions of the Prophet Muhammad (SAAS). Then these principles are further extend- ed by analogy but without dnftmg away from the divine moorings of the original Islamic sources (Qur’an and traditions of the Prophet Muhammad). In this way, both the individual and societal norms of conduct, decisions, and functions are given unique and definitive directions. The degree of arbitminess in ethical matters is thereby reduced to a matter of difference in interpreta- tion by the doctors of Islamic law and divinity. The fundamentals of Islamic ethical behavior, however, remain unique and well-defined. That is, man must augment his pure economic actions and preferences by the preferences and actions enunciated on the basis of the basic Qur’anic laws. Thereby, for every individual action in the mundane world, there is a reciprocal reward in the next world and a quantifiable equivalence of that Islamic action today. Man, by accepting this collateral action of the purely economic with the Islamic ethical preferences and actions, establishes what are known as T v or Godconsciousness and Idabat or worship!* These two fundamental elements of individual Islamic behaviour in social dealings became the cornerstone of Islamic ethics in economics. When these elements of individual behaviour are fully understood at the micro-economic level, and are fully mobilized by certain basic micro- and macro-economic instruments peculiar to the Islamic economy, then an inkgrated general equilibrium Islamic system can be formulated. “S.N.H. Naqvi, “Ethical Foundations of Islamic Economics,” Islamic Studies, Summer, 1978. %4. A. (3oudhy, An Islamic Social %lfitz Function (American Trust Publications, January, 1983), Preface. Masudul Alam Choudhw Micro-Economic Foundations 241 VII. The Micro-Economic Foundations of Islamic Economic Theory The micro-economic building block and their aggregation to the macro- economic level is essentially the foundation of economic analysis in Islamic perspective. It is also the ethical basis of the exchange system that reproduces itself through higher and higher levels of social preferences. This is due to the fact that it is the individual's ethical and economic behavioural patterns that will ultimately shape the Islamic society. The role of the state is only to promote and monitor the progressive Islamic transformation. We now go on to formalize the micro-economic framework of the ethical system in Islamic economics using the exchange mechanism we refered to earlier. VIII. Characterization of the Consumption Menu Endowed with a given exchange mechanism, the individual consump- tion menu is completely characterized by a set of preferences along each of which the consumer remains indifferent among alternative combinations of consumption. The restriction imposed in the Islamic consumption set is the condition of a satiation point set by the constraint of avoiding isruf in consumption. The total consumption menu for society is then defined by a lateral ag- gregation of individual consumption menus. Here, too, the limits of avoiding isriif imply mathematically that the social consumption menu given the con- straint of isriix meaning wasteful consumption, for each individual consumer will be closed and bounded:9 with a great number of consumer preferences ten- to concentrate about an average consumption level in society as a whole. Clearly, the greater the number of individuals who have their consumption preferences centering around this social average consumption, the more the problem of isriif is reduced and also the more the community is made equalitarian. F W y , mathematically speakmg, the closed and bounded nature of the consumption menu makes the individual and social consumption preferences concave to the origin. T a r mathematical concepts here, refix to G. Debreu, Zheory of blue: An Axiomatic Analysis of Economic Zheory (New York: John Wdey & Sons Inc., 1965). 242 The American Journal of Islamic Social Sciences Vol. 3, No. 2,1986 IX. Characterization of the Production Menu Formalization on the production side suggests that individual production menus d d have their isoquants compatible with the q u k m e n t of meeting a minimum level of production so as to contribute adeqktely toward satisfy- ing the acceptable social production level, that is of meeting both the current consumption needs as well as the social welfare needs of society now and in the future. Under-utilization of capacity is thus ruled out in the production menu hcing society as a whole. The social production menu is the lateral aggregation of individual production menus. FIGURE 3 Measurable Mappings in the Ethicdonsumption-Production Framework Establishing a General Equilibrium State Masudul Alam Choudhury Micro-Economic Foundations 243 On the other hand, limitations of resource availability, technological change, inventory considerations, and other variables could constrain pro- duction levels within given limits. This, however, is not a result of under- utilization of existing production capacity, for the latter is to be avoided in a social context. In an Islamic production menu the above two conditions - of sustaining production levels to meet social needs, and abiding by lights by conditions of technology and consumption demand but not by under-utilization of ex- isting production capacity) may be said to be aspects singular in nature. They stem from the underlying constraints of isriifboth on the consumption side and the production side and by the binding need for distribution and equity. The bounded and closed nature of individual production menus laterally aggregated to the society level imply mathematially the existence of an average level of production which every producer must satisfy or be out of the market. This average level of production is what would guarantee the attainment of a social production level. Thus, unlike the case of free entry and exit of firms found in classical and neo-classical economic thought, the exit and entry of firms in an Islamic market are determined by conditions of meeting a minimum socially required level of production of goods and services. Consequently, at the worst only natural monopolies could coexist with smaller producers. X. Characterization of the Ethical Menu The ethical menu is characterized by a set of exchange contraventions endowed in society for setting the value of the goods and services being con- sumed, produced, and distributed in a socially preferred way. The goal of the exchange mechanism in mainstream economics is to set an equilibrium state of price-quantity relations; its goal in social economics is to attain this equilibrium state in terms of the production of socially acceptable consump tion and production menus and also to reinforce and recreate the social choices through higher and higher levels of social preferences. This idea was explained by figures 1 and 2. In an Islamic society, the fundamental ethical considerations in consump tion, production, and distribution centre around God-consciousness, social justice, and individual responsibility toward Allah and one’s fellow beings. Since consumption and production menus are basically guided by constraints of isriifand distributive equity, the ethical element here plays the pri mordial role of replacing the hedonistic preferences to be found in utilitarian thought by social preferences. In this way we say that the consumption and produc- tion menus in the ethical ecorwlmic system in general and the Islamic economic system in particular are augmented by ethical preferences. The pri mordial 244 The American Journal of Islamic Social Sciences Vol. 3, No. 2, 1986 nature of these ethical preferences working in the total social system referred to earlier makes the ethical menu unbounded. The ethical preferences and menu cannot be bounded, for in that case the exchange mechanism would not be able to recreate and reinforce social choices through higher and higher levels of preferences. In the Islamic system, holding the ethical level fixed would mean that there are segments in the population on whom the Islamic ethical elements have not had sufficient effect. It might mean that individuals are practicing only their basic required Islamic duties and are not expanding upon them. It might mean that fums by increasing investments today, in order to avoid the incidence of ZakQh (wealth-tax paid in an Islamic state by in- dividuals and busineses after allowable exemptions), would the total benefits of zakah to a future period (benefits being purification and growth). The mathematical property of the ethical menu is that it may not be car- dinal but rather ordinal in nature. Being ordinal in nature it would still be possible to have a welldefined pre-ordering of ethical preferences. Therefore although the ethical menu is unbounded, not closed, but pre-ordered, so it is mathematically possible to establish a well-defined mapping of the ethical variables onto both a consumption menu and a production menu. This map- ping is the mathematical essence of ethical augmentation. XI. Ethical Equilibrium in the Consumption and Production Menus Ethical augmentation, by mapping the ethical menu onto the consump- tion and production menus, although welldefined, is not one-to-one. That is, any one of the social choices, such as the Islamic preference to avoid pro- digality in consumption and thereby the wasteful production of any kinds of goods, necessaries, comforts, or luxuries, could stem from both God- consciousness and social justice. An ethical consumption menu and an ethical production menu therefore exist and are welldefmed though not unique in the sense that they are multi-valued. The ordinal nature of ethical preferences and the well-defined existence of an ethical consumption menu and an ethical production set imply that every set of ethical preferences can augment a consumption preference such that the resulting ethically augmented consumption preference has a cardinal value in the real world. The same is true of the ethical augmentation of production. More than one ethical consideration can give rise to such a real value. Ethical mapping is thus capable of establishing a general equilibrium in the ethico- consumption-production universe. These mappings are shown in figure 3 in the context of the ethical general equilibrium system referred to here. Masudul Alam Choudhury XI1 . Conclusion Micro-Economic Foundations 245 In conclusion, we can see that an ethico-economic equilibrium is a con- ceptual reality but requires appropriate social instruments to bring it about. In the case of the total social system as viewed through the lens of social economics in general and Islamic economics in particular, the media of ethical transformation is exchange, no longer in the werfrei economic sense, but in the sense of an ever-evolving system of exchange to equilibrium and of fur- ther exchange to higher levels of equilibrium through higher and higher levels of social preferences. The social preferences that so evolve both at the individual ethical level and culminate thereafter at the societal ethical level make possible the study of ethico-economics in terms of a new approach to social welfare analysis and the study of macro-economics in terms of aggregations taking place at the micro-economic level. This is clearly an affront to established traditions that took shape after Keynes’ General Theory. This re-thinking is necessitated by the fact that ethical transformations fundamentally occur at the micro- economic level. The aggregation of ethically oriented activities occuring at the micro-economic level is the logical passage toward an ethical orientation to macro-economics. One way to work on such a bottom-up translation of ethical elements in macro-economics would be to construct a macroeconomic version of the social welfare function taking into consideration the principal macro-economic in- dicators, i.e. unemployment, growth, price-level, aggregate consumption, and aggregate savings (investment) , which could be reconstructed through their ethical micro-economic foundations. The bottom-up approach to an ethical macro-economics also suggests that only when ethical economic relationships are first formed and progressively reinforced at the micro-economic levels, can the state thereafter promote the ethico-economic foundations of an Islamic society. The Islamic transformation of a society is themfom a highly democratic process. It calls for the grassroots development of the individual, which then progressively culminates into a social order.