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