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Simulation in Islamic Economics

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

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Simulation in Islamic Economics

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  1. Simulation in Islamic Economics Sami al-Suwailem IRTI, IDB Group Ramadhan 1427H -- October 2006G

  2. New Paradigm • Limits to Neoclassical approach • Features of Islamic Economics • Need for a different approach

  3. Neoclassical Approach • Fixed and bounded choice set • Maximization decision rule • Deductive logic • No discovery or creativity • No entrepreneurship

  4. Complex World • Unbounded choice set • Perpetual novelty • Non-computable options • Un-provable true statements

  5. Complexity Theory • Model the process • Ecological rationality • Induction and exploration

  6. Comparison

  7. Complex Systems • Self-organization • Emergence

  8. Self-Organization • Local interactions • Decentralized global order • Examples

  9. Bird Flocks • Group of birds moving together • Why? • No leader • Rules: • Follow neighbors • Keep a distance • Avoid obstacles

  10. Segregation • Two groups mixed • Rules: • If < 30% of neighbors, move • Else, stay • Unintended segregation

  11. Emergence • The whole is greater than the sum • The system performs functions the components can’t • Examples: • Brain • Ants & bees • Markets

  12. Structure of Complex Systems • Behavior governed by two sets of variables: • Independent variables • Relative variables

  13. Properties • Connectedness • Positive feedback • Edge of chaos

  14. Economic Model

  15. Relative Behavior • Widely observed • Evidently documented • Links complexity with psychology

  16. Relative Consumption • Unequal consumption levels • Consumption gap • How to close the gap?

  17. Riba • Loan finances consumption • Interest adds to lender’s income • Lender’s consumption rises • Average consumption rises • The gap widens

  18. Dynamics of Riba • Interest causes feedback loop • Debt accelerates till bankruptcy • The system moves towards chaos

  19. Markup Finance • Finance restricted to new consumption • No refinancing • Problem of delay? • Cap on installment

  20. Dynamics of Markup • Debt is bounded by income • Feedback is limited • System is stable

  21. Charity • Charity raises average consumption • Donor’s consumption thus rises • Aggregate consumption rises

  22. Simulation • Types of simulation: • Mathematical simulation • Agent-based simulation

  23. Agent-based Simulation • Tracks interactions of multiple agents • Each agent with different properties • Emergence of aggregate behavior

  24. ABS Software • Netlogo • Agentsheets • Repast • Ascape

  25. Model Aspects • Consumption • Wealth • Loans and Debt • Bankruptcy

  26. Consumption • Determined by: • Income and wealth (indep. variables) • Consumption of local neighbors • Income is exogenous • Wealth is accumulated savings

  27. Surpluses & Deficits • Surpluses are managed centrally • Deficits are financed from accumulated surpluses • Loans are distributed equally to borrowers

  28. Wealth • Total assets = cash + credit • Wealth = share in total assets – debt • Share = acc. surplus / agg. surpluses • Total credit = total debt • Agg. wealth = total cash

  29. Equations

  30. Debt • Debt = acc. loans – payments • Interest accrues on loans + past-due • Markup accrues on loans only

  31. Bankruptcy • If installment > 2 mean income • Out of the system 15 periods • Wealth transferred to creditors

  32. Results • Cyclical consumption • Concentrated wealth • Low efficiency

  33. Consumption

  34. Net-income

  35. Lorenz Curve

  36. Efficiency

  37. Charity

  38. Conclusion • The need for an alternative paradigm • The importance of agent-based simulation • A fresh look at Islamic economics

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