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Simulation in Islamic Economics

This document presents a revolutionary approach to Islamic economics, arguing for a move away from traditional neoclassical methods. It highlights the limitations of fixed choice sets and maximization rules while advocating for a framework that embraces ecological rationality and self-organization. By utilizing agent-based simulations, the work illustrates complex interactions among agents, the dynamics of consumption, wealth distribution, and the impact of riba on economic stability. This new perspective aims to bridge gaps in understanding contemporary economic behavior and promote a more holistic view of economic systems.

stephen-david
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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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