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Develops an ethico‐economic general equilibrium system that is founded on a well defined ethically oriented choice of goods that imparts an ethical motivation to the activities of consumption, production and distribution. Shows that the choice of such a numeraire market basket and its related prices is instrumental on the polity‐market interaction, brought out as the heart of the problem, that is treating ethics as endogenous phenomena of the social order. The resulting ethico‐economic general equilibrium system is thereby found to be only locally stable, not globally stable in its equilibria, which are all policy induced and market driven, perturbed and unsettling as polity evolves.

The purpose of this paper is to explain how to reduce transaction cost in corporate governance by subjecting it institutionally to ethics and values of interactive and consensual decision making with transparency gained from participation between managers and shareholders/stakeholders and the community at large. This is an epistemological problem in the Islamic approach to corporate governance. The paper brings these out in technical language and methodology.

An analytical epistemological and comparative study between mainstream and Islamic conceptions in corporate governance is used to develop the idea mentioned above. The analytical model used is of an ethico‐economic general equilibrium type with learning variables.

The Islamic theory of corporate governance under the rubric of its epistemology of unity of knowledge treated within a systems approach is found to reduce transaction cost and produce better management decisions.

The paper is mostly theoretical in nature but carries quantitative facts on the limitations of existing corporate governance practice at the accountancy level in the global scene.

The adoption of institutional modes to generate interactive, integrative and evolutionary frameworks of corporate decision making is derived from the content of the paper. Recent global incidents with WorldCom and Enron are cited to show how corporate governance has failed as an effective means of reducing the immense transaction costs that were engendered by the failure of these mega corporations.

The paper conveys an original idea that has not been taken up elsewhere. It reflects the systems approach to the study of behavior in a corporate setting within the epistemology of systemic unity of knowledge. Besides, in the Islamic comparison that the paper undertakes in contradistinction to the mainstream approach, the methodology of systemic unity of knowledge conveys an altogether new way of studying corporate governance in the related new institutional framework.

This chapter tries to find that how to reduce transaction cost in corporate governance by subjecting it institutionally to ethics and values of interactive and consensual decision making with transparency gained from participation between managers and shareholders/stakeholders and the community at large. This is an epistemological problem in Islamic approach to corporate governance. This chapter brings these out in technical language and methodology. An analytical epistemological and comparative study between mainstream and Islamic conceptions in corporate governance is used to develop the idea mentioned above. The analytical model used is of an ethico-economic general equilibrium type with learning variables. This chapter conveys an original idea that has not been taken up elsewhere. It reflects the systems approach to the study of behavior in corporate setting within the epistemology of systemic unity of knowledge.

Argues that ethics and values are systemic realities and can be scientifically programmed in cybernetically oriented socio‐scientific systems. The case taken is of economic general equilibrium with possibilities of multiple equilibria. The treatment of ethics and values in this sense in economic theory makes them endogenous phenomena of socio‐economic reality. This substantive idea of ethics and values as endogenous phenomena in socio‐scientific systems is termed the principle of ethical endogeneity. Its social cybernetical possibilities are developed mathematically. While the mathematical treatment uses bilinear algebra for the formulation, greater importance may be seen in the scientific essence of the principle of ethical endogeneity applicable universally. This is particularly true of systems which need to be epistemologically unified.

To start off our ethical economic thesis in this article, a few examples will suffice to point out the important relevance of ethical considerations in economic theory. During the 1950s and the 1960s the developing countries were being swayed by economic planners on prescriptions of neo‐classical growthmanship. Two such prescriptive models of economic growth were the Harrod‐Domar model and Rostow's linear stages model. According to the Harrod‐Domar model, economic growth was based on the attainment of the right quantity and mixture of savings, investment and foreign aid. Third World countries were being asked to follow a plan based on a long‐run economic growth path emulating the pattern of growth of the developed economies. In Rostow's linear stages model, optimisation of savings and investment was considered as the principal instrument of economic growth for the Third World. It turned out that the mobilisation of capital through savings and investment took the form of massive and expensive transfer of technology from the industrialised countries to the developing ones.

In considering the role of ethics in Islamic economic and finance theory, it is necessary to understand the nature of ethics as human behavior derived from the foundation of Tawhid (oneness of Allah=unity of the divine law) through the transmission medium of the Sunnah (guidance of the Prophet Muhammad). These are together taken up as the basis of spiritual guidance in Islam – hudal il-mutaqqin (Qur'an, 2:2). This foundation of Islamic epistemology in concert with the medium of epistemological discourse among the learned participants establishes the idea of a System and its embedded circular causation relations in view of the ethics in the Qur'anic world-system. It is also necessary to understand how ethics, as so derived from the epistemological roots and processed through the ontological investigation of values and directions for rule setting pertaining to given issues at hand, establish the premise of the shari'ah along with its ijtihadi (foundational Islamic investigation for rule setting) extensions.

The paper aims to offer a new perspective on the strictly microeconomic nature of all of Islamic economics. Writers in this field continue to work in the mainstream tradition without noticing the micro‐interface of the theoretical nature of Islamic economics. This paper aims to address this issue.

The paper provides a comparative study of received literature in the history of economic thought and contrasts the ethical foundations of Islamic economics from the mainstream dichotomy between microeconomic and macroeconomic parts.

There is a cogent microeconomic foundation of Islamic economics for the economy‐wide treatment of ethical economic issues and problems including the policy framework.

This is a theoretical exploration. The empirical part is yet to be expanded upon.

The paper has practical implications for graduate students on policy formulation and economic theorizing, by making them analytically aware on the extensive relevance of microeconomics in the building block of ethical content of economic theory, policy and institutions.

The paper presents original thinking along lines of microeconomic foundations of macroeconomic theory from the social and ethical vantage points of Islamic economics and finance that writers in this field should not ignore. The paper is meant for serious students and academics of economic theory and ethical social policy embedded in the economic treatment.

A comparative and critical examination of the methodology, goals and history of development of the field of Western social sciences in Islamic perspectives is presented. Economics is treated as a parallel case study in this respect. It is shown that the field of Western social sciences was the outcome of the revolt against the Church in the eighteenth century by the scholastic school to sever science from religion. Ever since, it has gained momentum also under the Cartesian philosophy of empiricism. Thus, the age‐long advance of the social sciences has shown increasing independence within each of its sub‐disciplines. An inward looking hegemony developed among the various sub‐disciplines. Such developments have made it increasingly difficult for the treatment of ethics and values as integrable elements in social investigation. The essence of a human analysis of social problems is thereby, misunderstood in modern social science analysis. The philosophy, nature and methodology of social investigation in Islamic framework are examined. It is argued that the Western concern with dichotomy between science and religion is not applicable to Islam. Consequently, there is a good possibility for studying social problems by an integrated approach among all the sub‐disciplines of the social sciences. This gives rise to an interdisciplinary study of social issues and problems and the development of a generalised social equilibrium system in the Islamic framework. We have developed one such comprehensive model endowed by its intrinsic Islamic ethics and values emanating fundamentally from the dynamic Quranic essence of the Unity of God in the working of the universe, “Al‐Tawhid”. The key principles and instruments are developed. The central role of the “shura” in functionally endowing the integrated study of social issues, is studied. In this context, the study of Islamic economics as one of Islamic political economy is examined. A specific economic problem in this area is explored. It is concluded that the approach of the Islamic social investigation and of Islamic political economy is what the future generation of social and economic thinkers will be working towards.

The article makes a comprehensive study of the development of social economic thought in the history of economic doctrines. Traces of social economic development are dated back to the Physiocrats and moral philosophers and reference is made to the early Arab works in the developments of these social economic doctrines. The social economic thought in the classical school of economic theory is critically studied. It is shown that with the advancement of economic theory in the hands of the neoclassical school and its latter‐day developments social economic doctrines receded from mainstream economics. The contemporary social economists in North America have fallen into the trap of these neoclassical approaches applied to the study of social economic phenomena. The article also shows that similar neoclassical and ethically neutral traces continue in the works of the mixed economy theorists, institutionalists, macroeconomists, monetarists, rational expectations hypothesists, public and social choice theorists of all types. Thus, the whole gamut of mainstream economics is shown to be trapped in an epistemological and methodological quandary as to how ethical phenomena are to be treated rationally in the framework of economic theory.