simulation in islamic economics
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Simulation in Islamic Economics. Sami al-Suwailem IRTI, IDB Group Ramadhan 1427H -- October 2006G. New Paradigm. Limits to Neoclassical approach Features of Islamic Economics Need for a different approach. Neoclassical Approach. Fixed and bounded choice set Maximization decision rule - PowerPoint PPT PresentationTRANSCRIPT
Simulation in Simulation in Islamic EconomicsIslamic Economics
Simulation in Simulation in Islamic EconomicsIslamic Economics
Sami al-SuwailemSami al-Suwailem
IRTI, IDB GroupIRTI, IDB Group
Ramadhan 1427H -- October Ramadhan 1427H -- October 2006G2006G
Sami al-SuwailemSami al-Suwailem
IRTI, IDB GroupIRTI, IDB Group
Ramadhan 1427H -- October Ramadhan 1427H -- October 2006G2006G
New ParadigmNew ParadigmNew ParadigmNew Paradigm
Limits to Neoclassical approachLimits to Neoclassical approach Features of Islamic EconomicsFeatures of Islamic Economics Need for a different approachNeed for a different approach
Limits to Neoclassical approachLimits to Neoclassical approach Features of Islamic EconomicsFeatures of Islamic Economics Need for a different approachNeed for a different approach
Neoclassical ApproachNeoclassical ApproachNeoclassical ApproachNeoclassical Approach
Fixed and bounded choice setFixed and bounded choice set Maximization decision ruleMaximization decision rule Deductive logicDeductive logic No discovery or creativityNo discovery or creativity No entrepreneurship No entrepreneurship
Fixed and bounded choice setFixed and bounded choice set Maximization decision ruleMaximization decision rule Deductive logicDeductive logic No discovery or creativityNo discovery or creativity No entrepreneurship No entrepreneurship
Complex WorldComplex WorldComplex WorldComplex World
Unbounded choice setUnbounded choice set Perpetual noveltyPerpetual novelty Non-computable optionsNon-computable options Un-provable true statementsUn-provable true statements
Unbounded choice setUnbounded choice set Perpetual noveltyPerpetual novelty Non-computable optionsNon-computable options Un-provable true statementsUn-provable true statements
Complexity TheoryComplexity TheoryComplexity TheoryComplexity Theory
Model the processModel the process Ecological rationalityEcological rationality Induction and explorationInduction and exploration
Model the processModel the process Ecological rationalityEcological rationality Induction and explorationInduction and exploration
ComparisonComparisonComparisonComparison
NTNT CTCT
SimplifiedSimplified LandscapeLandscape ProcessProcess
DecisionDecision MaximizatioMaximizationn
AdaptationAdaptation
MethodoloMethodologygy DeductionDeduction InductionInduction
RationalityRationality IndividualIndividual EcologicalEcological
Complex SystemsComplex SystemsComplex SystemsComplex Systems
Self-organizationSelf-organization EmergenceEmergence
Self-organizationSelf-organization EmergenceEmergence
Self-OrganizationSelf-OrganizationSelf-OrganizationSelf-Organization
Local interactionsLocal interactions Decentralized global orderDecentralized global order ExamplesExamples
Local interactionsLocal interactions Decentralized global orderDecentralized global order ExamplesExamples
Bird FlocksBird FlocksBird FlocksBird Flocks
Group of birds moving togetherGroup of birds moving together Why?Why?
No leaderNo leader Rules:Rules:
Follow neighborsFollow neighbors Keep a distanceKeep a distance Avoid obstaclesAvoid obstacles
Group of birds moving togetherGroup of birds moving together Why?Why?
No leaderNo leader Rules:Rules:
Follow neighborsFollow neighbors Keep a distanceKeep a distance Avoid obstaclesAvoid obstacles
SegregationSegregationSegregationSegregation
Two groups mixedTwo groups mixed Rules:Rules:
If < 30% of neighbors, moveIf < 30% of neighbors, move Else, stayElse, stay
Unintended segregationUnintended segregation
Two groups mixedTwo groups mixed Rules:Rules:
If < 30% of neighbors, moveIf < 30% of neighbors, move Else, stayElse, stay
Unintended segregationUnintended segregation
EmergenceEmergenceEmergenceEmergence
The whole is greater than the sumThe whole is greater than the sum The system performs functions the The system performs functions the
components can’tcomponents can’t Examples:Examples:
BrainBrain Ants & beesAnts & bees MarketsMarkets
The whole is greater than the sumThe whole is greater than the sum The system performs functions the The system performs functions the
components can’tcomponents can’t Examples:Examples:
BrainBrain Ants & beesAnts & bees MarketsMarkets
Structure of Complex Structure of Complex SystemsSystems
Structure of Complex Structure of Complex SystemsSystems
Behavior governed by two sets of Behavior governed by two sets of variables:variables: Independent variablesIndependent variables Relative variablesRelative variables
Behavior governed by two sets of Behavior governed by two sets of variables:variables: Independent variablesIndependent variables Relative variablesRelative variables
),( 1,1,, tititi fx xz
PropertiesPropertiesPropertiesProperties
ConnectednessConnectedness Positive feedbackPositive feedback Edge of chaosEdge of chaos
ConnectednessConnectedness Positive feedbackPositive feedback Edge of chaosEdge of chaos
Economic ModelEconomic ModelEconomic ModelEconomic Model
),( 1,1,, tititi cyfc
Relative BehaviorRelative BehaviorRelative BehaviorRelative Behavior
Widely observedWidely observed Evidently documentedEvidently documented Links complexity with psychologyLinks complexity with psychology
Widely observedWidely observed Evidently documentedEvidently documented Links complexity with psychologyLinks complexity with psychology
Relative ConsumptionRelative ConsumptionRelative ConsumptionRelative Consumption
Unequal consumption levelsUnequal consumption levels Consumption gapConsumption gap How to close the gap?How to close the gap?
Unequal consumption levelsUnequal consumption levels Consumption gapConsumption gap How to close the gap?How to close the gap?
RibaRibaRibaRiba
Loan finances consumptionLoan finances consumption Interest adds to lender’s incomeInterest adds to lender’s income Lender’s consumption risesLender’s consumption rises Average consumption risesAverage consumption rises The gap widensThe gap widens
Loan finances consumptionLoan finances consumption Interest adds to lender’s incomeInterest adds to lender’s income Lender’s consumption risesLender’s consumption rises Average consumption risesAverage consumption rises The gap widensThe gap widens
Dynamics of RibaDynamics of RibaDynamics of RibaDynamics of Riba
Interest causes feedback loopInterest causes feedback loop Debt accelerates till bankruptcyDebt accelerates till bankruptcy The system moves towards chaosThe system moves towards chaos
Interest causes feedback loopInterest causes feedback loop Debt accelerates till bankruptcyDebt accelerates till bankruptcy The system moves towards chaosThe system moves towards chaos
Markup FinanceMarkup FinanceMarkup FinanceMarkup Finance
Finance restricted to new Finance restricted to new consumptionconsumption
No refinancingNo refinancing Problem of delay?Problem of delay?
Cap on installmentCap on installment
Finance restricted to new Finance restricted to new consumptionconsumption
No refinancingNo refinancing Problem of delay?Problem of delay?
Cap on installmentCap on installment
Dynamics of MarkupDynamics of MarkupDynamics of MarkupDynamics of Markup
Debt is bounded by incomeDebt is bounded by income Feedback is limitedFeedback is limited System is stableSystem is stable
Debt is bounded by incomeDebt is bounded by income Feedback is limitedFeedback is limited System is stableSystem is stable
CharityCharityCharityCharity
Charity raises average Charity raises average consumptionconsumption
Donor’s consumption thus risesDonor’s consumption thus rises Aggregate consumption risesAggregate consumption rises
Charity raises average Charity raises average consumptionconsumption
Donor’s consumption thus risesDonor’s consumption thus rises Aggregate consumption risesAggregate consumption rises
SimulationSimulationSimulationSimulation
Types of simulation:Types of simulation: Mathematical simulationMathematical simulation Agent-based simulationAgent-based simulation
Types of simulation:Types of simulation: Mathematical simulationMathematical simulation Agent-based simulationAgent-based simulation
Agent-based SimulationAgent-based SimulationAgent-based SimulationAgent-based Simulation
Tracks interactions of multiple Tracks interactions of multiple agentsagents
Each agent with different Each agent with different propertiesproperties
Emergence of aggregate behaviorEmergence of aggregate behavior
Tracks interactions of multiple Tracks interactions of multiple agentsagents
Each agent with different Each agent with different propertiesproperties
Emergence of aggregate behaviorEmergence of aggregate behavior
ABS SoftwareABS SoftwareABS SoftwareABS Software
NetlogoNetlogo AgentsheetsAgentsheets RepastRepast AscapeAscape
NetlogoNetlogo AgentsheetsAgentsheets RepastRepast AscapeAscape
Model AspectsModel AspectsModel AspectsModel Aspects
ConsumptionConsumption WealthWealth Loans and DebtLoans and Debt BankruptcyBankruptcy
ConsumptionConsumption WealthWealth Loans and DebtLoans and Debt BankruptcyBankruptcy
ConsumptionConsumptionConsumptionConsumption
Determined by:Determined by: Income and wealth (indep. variables)Income and wealth (indep. variables) Consumption of local neighborsConsumption of local neighbors
Income is exogenousIncome is exogenous Wealth is accumulated savingsWealth is accumulated savings
Determined by:Determined by: Income and wealth (indep. variables)Income and wealth (indep. variables) Consumption of local neighborsConsumption of local neighbors
Income is exogenousIncome is exogenous Wealth is accumulated savingsWealth is accumulated savings
Surpluses & DeficitsSurpluses & DeficitsSurpluses & DeficitsSurpluses & Deficits
Surpluses are managed centrallySurpluses are managed centrally Deficits are financed from Deficits are financed from
accumulated surplusesaccumulated surpluses Loans are distributed equally to Loans are distributed equally to
borrowersborrowers
Surpluses are managed centrallySurpluses are managed centrally Deficits are financed from Deficits are financed from
accumulated surplusesaccumulated surpluses Loans are distributed equally to Loans are distributed equally to
borrowersborrowers
WealthWealthWealthWealth
Total assets = cash + creditTotal assets = cash + credit Wealth = share in total assets – Wealth = share in total assets –
debtdebt Share = acc. surplus / agg. Share = acc. surplus / agg.
surplusessurpluses Total credit = total debtTotal credit = total debt Agg. wealth = total cashAgg. wealth = total cash
Total assets = cash + creditTotal assets = cash + credit Wealth = share in total assets – Wealth = share in total assets –
debtdebt Share = acc. surplus / agg. Share = acc. surplus / agg.
surplusessurpluses Total credit = total debtTotal credit = total debt Agg. wealth = total cashAgg. wealth = total cash
EquationsEquationsEquationsEquations
1,1,21,1, ))(1( titititi cwyc
titttiti debtCreditCashw ,,, )(
DebtDebtDebtDebt
Debt = acc. loans – paymentsDebt = acc. loans – payments Interest accrues on loans + past-Interest accrues on loans + past-
duedue Markup accrues on loans onlyMarkup accrues on loans only
Debt = acc. loans – paymentsDebt = acc. loans – payments Interest accrues on loans + past-Interest accrues on loans + past-
duedue Markup accrues on loans onlyMarkup accrues on loans only
BankruptcyBankruptcyBankruptcyBankruptcy
If installment > 2 mean incomeIf installment > 2 mean income Out of the system 15 periodsOut of the system 15 periods Wealth transferred to creditorsWealth transferred to creditors
If installment > 2 mean incomeIf installment > 2 mean income Out of the system 15 periodsOut of the system 15 periods Wealth transferred to creditorsWealth transferred to creditors
ResultsResultsResultsResults
Cyclical consumptionCyclical consumption Concentrated wealthConcentrated wealth Low efficiencyLow efficiency
Cyclical consumptionCyclical consumption Concentrated wealthConcentrated wealth Low efficiencyLow efficiency
55
60
65
70
75
80
0 250 500 750 1000 1250
default
markup
interest
1500
ConsumptionConsumption
Net-incomeNet-income
58
60
62
64
66
68
70
72
74
76
0 250 500 750 1000 1250
default
markup
interest
1500
Lorenz CurveLorenz Curve
0
10
20
30
40
50
60
70
80
90
100
0 10 20 30 40 50 60 70 80 90 100
% of agents
% o
f wea
lth diagonal
default
markup
interest
EfficiencyEfficiencyEfficiencyEfficiency
DefaultDefault MarkupMarkup InterestInterest
Acc. surplusAcc. surplus 2,5812,581 2,7842,784 10,95010,950
Acc. loansAcc. loans 11,15411,154 11,41011,410 11,73011,730
Acc. Acc. repaymentrepayment
10,54310,543 14,02014,020 23,26823,268
Repayment per Repayment per $$
0.950.95 1.231.23 1.981.98
TurnoverTurnover 4.324.32 4.104.10 1.071.07
Cost of financeCost of finance 00 0.47%0.47% 2.82%2.82%
Rate of returnRate of return 00 1.94%1.94% 3.03%3.03%
CharityCharityCharityCharity
zz = = 0%0%
zz = 2.5% = 2.5% zz = 5% = 5% zz = = 10%10%
Mean Mean CC 7474 7878 7979 7979
Median Median CC 7373 7676 7777 7777
CC of Donors of Donors 86.186.1 86.6486.64 86.4486.44 86.4686.46
CC of of ReceiversReceivers
63.063.0 70.9870.98 72.7372.73 72.7572.75
ConclusionConclusionConclusionConclusion
The need for an alternative The need for an alternative paradigmparadigm
The importance of agent-based The importance of agent-based simulationsimulation
A fresh look at Islamic economicsA fresh look at Islamic economics
The need for an alternative The need for an alternative paradigmparadigm
The importance of agent-based The importance of agent-based simulationsimulation
A fresh look at Islamic economicsA fresh look at Islamic economics