Simulation in Islamic

Economics
Sami al-Suwailem
IRTI, IDB Group
Thul Kiadah 1428H -- November 2007G
 New Paradigm
 Limitsto Neoclassical approach
 Features of Islamic Economics

 Need for a different approach

 Neoclassical Approach
 Fixedand bounded choice set
 Maximization decision rule

 Deductive logic

 No discovery or creativity

 No entrepreneurship
 Complex World
 Unbounded choice set
 Perpetual novelty

 Non-computable options

 Un-provable true statements

 Complexity Theory
 Model the process
 Ecological rationality

 Induction and exploration

 Comparison

NT CT

Simplified Landscape Process

Decision Maximization Adaptation

Methodology Deduction Induction

Rationality Individual Ecological

 Complex Systems
 Self-organization

 Emergence
 Self-Organization
 Localinteractions
 Decentralized global order

 Examples
 Bird Flocks
 Group of birds moving together
 Why?

 No leader
 Rules:

 Follow neighbors
 Keep a distance

 Avoid obstacles
 Segregation
 Two groups mixed
 Rules:

 If< 30% of neighbors, move

 Else, stay

 Unintended segregation
 Emergence
 The whole is greater than the sum
 The system performs functions the

components can’t
 Examples:

 Brain

 Ants& bees
 Markets
Structure of Complex Systems
 Behavior governed by two sets of
variables:
 Independent variables
 Relative variables

xi ,t  f (z i ,t 1 , x i ,t 1 )
 Properties
 Connectedness

 Positivefeedback
 Edge of chaos
 Economic Model

ci ,t  f ( yi ,t 1 , ci ,t 1 )
 Relative Behavior
 Widely observed
 Evidently documented

 Links complexity with psychology

 Relative Consumption
 Unequal consumption levels
 Consumption gap

 How to close the gap?

 Riba
 Loan finances consumption
 Interest adds to lender’s income

 Lender’s consumption rises

 Average consumption rises

 The gap widens

 Dynamics of Riba
 Interestcauses feedback loop
 Debt accelerates till bankruptcy

 The system moves towards chaos

 Markup Finance
 Finance restricted to new consumption
 No refinancing

 Problem of delay?

 Cap on installment
 Dynamics of Markup
 Debt is bounded by income
 Feedback is limited

 System is stable
 Charity
 Charityraises average consumption
 Donor’s consumption thus rises

 Aggregate consumption rises

 Simulation
 Types of simulation:
 Mathematical simulation
 Agent-based simulation
 Agent-based Simulation
 Tracks interactions of multiple agents
 Each agent with different properties

 Emergence of aggregate behavior

 ABS Software
 Netlogo

 Agentsheets

 Repast

 Ascape
 Model Aspects
 Consumption

 Wealth

 Loansand Debt
 Bankruptcy
 Consumption
 Determined by:
 Incomeand wealth (indep. variables)
 Consumption of local neighbors

 Income is exogenous
 Wealth is accumulated savings
 Surpluses & Deficits
 Surpluses are managed centrally
 Deficits are financed from accumulated

surpluses
 Loans are distributed equally to

borrowers
 Wealth
 Total assets = cash + credit
 Wealth = share in total assets – debt

 Share = acc. surplus / agg. surpluses

 Total credit = total debt

 Agg. wealth = total cash

 Equations

ci ,t  (1   )( 1 yi ,t 1   2 wi ,t 1 )  ci ,t 1

wi ,t   i ,t (Casht  Creditt )  debti ,t

 Debt
 Debt = acc. loans – payments
 Interest accrues on loans + past-due

 Markup accrues on loans only

 Bankruptcy
 If
installment > 2 mean income
 Out of the system 15 periods

 Wealth transferred to creditors

 Results
 Cyclicalconsumption
 Concentrated wealth

 Low efficiency
 Consumption
80

75

70

Standard
Markup
Interest
65

60

55
0 250 500 750 1000 1250 1500

Time
 Net-income
80

75

70

Standard
Markup
Interest

65

60

55
0 250 500 750 1000 1250 1500

Time
 Lorenz Curve
100

90

80

70

60
% of Wealth

Diagonal
Standard
50
Markup
Interest
40

30

20

10

0
0 10 20 30 40 50 60 70 80 90 100

% of Agents
 Wealth Distribution
% of Agents Standard Markup Interest
10 0.4 0.2 0.0
20 2.3 1.4 0.0
30 6.3 4.9 0.1
40 12 10 0.2
50 20 18 0.5
60 30 27 1.4
70 42 39 4.2
80 57 54 13
90 75 72 38
 Efficiency
Standard Markup Interest
Acc. loans 10,551 11,137 11,485
Acc. repayment 9,969 13,677 23,430
Acc. surplus 2,440 2,595 10,459
Repayment per $ 0.945 1.228 2.040
Turnover 4.32 4.29 1.10
Cost of finance 0% 0.47% 2.91%
Rate of return 0% 2.03% 3.20%
 Charity

z = 0% z = 2.5% z = 5% z = 10%
Mean C 74.0 78.1 79.0 78.9
Median C 72.9 76.4 77.3 77.1
C of Donors 84.8* 85.0 85.1 84.9
C of Receivers 63.6* 71.5 73.3 73.2
* Potential donors and receivers
 Conclusion
 The need for an alternative paradigm
 The importance of agent-based

simulation
 A fresh look at Islamic economics