Simulation in Simulation in Islamic Economics Islamic Economics Sami al-Suwailem Sami al-Suwailem IRTI, IDB Group IRTI, IDB Group Thul Kiadah 1428H -- November Thul Kiadah 1428H -- November 2007G 2007G
Jan 02, 2016
Simulation in Simulation in Islamic EconomicsIslamic Economics
Simulation in Simulation in Islamic EconomicsIslamic Economics
Sami al-SuwailemSami al-Suwailem
IRTI, IDB GroupIRTI, IDB Group
Thul Kiadah 1428H -- November Thul Kiadah 1428H -- November 2007G2007G
Sami al-SuwailemSami al-Suwailem
IRTI, IDB GroupIRTI, IDB Group
Thul Kiadah 1428H -- November Thul Kiadah 1428H -- November 2007G2007G
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
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
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
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 W
ea
lth
Diagonal
Standard
Markup
Interest
Wealth DistributionWealth DistributionWealth DistributionWealth Distribution
% of % of AgentsAgents
StandardStandard MarkupMarkup InterestInterest
1010 0.40.4 0.20.2 0.00.0
2020 2.32.3 1.41.4 0.00.0
3030 6.36.3 4.94.9 0.10.1
4040 1212 1010 0.20.2
5050 2020 1818 0.50.5
6060 3030 2727 1.41.4
7070 4242 3939 4.24.2
8080 5757 5454 1313
9090 7575 7272 3838
EfficiencyEfficiencyEfficiencyEfficiency
StandardStandard MarkupMarkup InterestInterest
Acc. loansAcc. loans 10,55110,551 11,13711,137 11,48511,485
Acc. Acc. repaymentrepayment
9,9699,969 13,67713,677 23,43023,430
Acc. surplus Acc. surplus 2,4402,440 2,5952,595 10,45910,459
Repayment per Repayment per $$
0.9450.945 1.2281.228 2.0402.040
TurnoverTurnover 4.324.32 4.294.29 1.101.10
Cost of financeCost of finance 0%0% 0.47%0.47% 2.91%2.91%
Rate of returnRate of return 0%0% 2.03%2.03% 3.20%3.20%
CharityCharityCharityCharity
zz = = 0%0%
zz = 2.5% = 2.5% zz = 5% = 5% zz = = 10%10%
Mean Mean CC 74.074.0 78.178.1 79.079.0 78.978.9
Median Median CC 72.972.9 76.476.4 77.377.3 77.177.1
CC of Donors of Donors 84.884.8** 85.085.0 85.185.1 84.984.9
CC of of ReceiversReceivers
63.663.6** 71.571.5 73.373.3 73.273.2* Potential donors and receivers* Potential donors and receivers
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