_ # Economic Simulation ## Summary In this essay, we will build a model of the economy so as to do simulations that might give us a better understanding how the economy works. Then, we will expand the model to include new modes of production that have risen due to the internet. We will try to find out how they change the economy. Specifically, I would like to model the Open Value Network model and the ryaki model embedded in the capitalist economy. ## Method of modeling and Rules for the interpretation of the results When a simulation is performed it is important to understand that the model determines the results of the simulation. Thus if someone wanted to have specific results, all it had to do was change the model so as to receive those results. In other words, apart from the simulation itself and its results, it is important to point beforehand that the results describe the model and not reality. Consider those 2 logical statements: * Animals use photosynthesis to acquire energy. * Humans are animals. * Result: Humans use photosynthesis to acquire energy. The simulation helps extract information about the model and that helps understand its internal logic, dynamics. It helps us find causational relations between its properties. But if the model does not reflect reality, the results will not too. Given that all models are abstractions of reality, it is very important to notice whether the details we omited do affect the results of the simulation. In this model, we will try to explicitely point to the details we omit. We will point to simplifications we make and ask everyone to provide arguments that show that those simplifications are important and alter the final results. At the same time, anyone should be able to contribute to provide more complex models. ### Initial preconceptions - Motivation My belief is that the emergence of classes as defined by Karl Marx, the worker class and the capitalist class can be explained due to market inefficiencies. Specifically, the existence of investment risk and at the same time the existence of risk aversion results in the poor people not investing. At the same time, information assymetry in favor of the rich or the big companies determines the risk for new investments more accurately while capital assymetry allows them to invest more money. Another factor that contributes to the emergence of classes is the great sum of money that investments require for both their fixed and varriable capital. It would require the savings of many people to perform one investment. In accordance to Karl Marx's point of view and in opposition to the libertarian point of view, I believe that those market inefficiencies cannot be resolved. They will always exist because simply put, we cannot have perfect knowledge that will remove risk as an economic factor of investment. Thus the only option is to either reform the market in a groundbreaking way so that it is not affected by its inefficiencies in the distribution of revenue as ryaki does or introduce a new democratic method of distribution of revenue altogether. ### Type of Economic Model We will build a microeconomic model of the economy. The reason for doing that is because of our initial preconceptions and motivations. We want to find data that will link microeconomic common behaviors to the macroeconomic properties of the economy. //TODO The next paragraph is not required or it needs to be reduced to small general ideas because the next model will reintroduce the same concepts. ## Abstract Theory ### Economic Agent Any microeconomic model of the economy needs to define the agents of the model. We define an **economic agent** to be an entity that makes decisions that affect the economy. That forces us to define what the economy is. The **economy** is defined as all the processes in which humans labor to produce use-value and distribute it among themselves. **Labor** is the process of purposefully exerting oneself, spending effort. **Use value** is the general term that expresses the increase in happiness that one or more people receive with the use of an item or service. The **environment** is the material basis in which all economic processes take place. Such a definition of an **economic agent** is very broad. Economic agents are the robots of a factory according to [artificial intelligence.](https://en.wikipedia.org/wiki/Intelligent_agent). Any **group** of people that take decisions and act together is also an economic agent. The most prominent type of such an agent is the **firm**. But even the firm is not exactly a single group of people. We have the legal form of the firm. We have the internal organization of the firm but we also have the group of the shareholders. Thus we cannot model the firm simply by representing it as a homogenous group. There are relations that need to be expressed in order to simulate the behavior of the firm. #### Supportive Agent One type of an economic agent is the **supportive agent**. A **supportive agent** is any entity whose decisions and actions do not directly produce use value, but affects others that do. The legal system of a country and the police play such a role. Many other professions have such a responsibility. It is important to acknowledge them. ### Technology **Technology** is the knowledge of how to produce use value, how to transform materials from the environment into useful things. The knowledge is not independent of its holder. A person retains knowledge in his memory. Libraries and information systems store knowledge as well. That information can either be public or private. A firm's trade secrets and patents are protected by law. Knowledge can be shared or kept secret. Moreover, knowledge has production mechanisms. It requires tools, human labor and previous knowledge to produce it. Thus, when one models the economy, he should not only take into account the knowledge of the era but the entity that holds it, its production and propagation mechanisms. ### Tools **Tools** are material or immaterial objects that are used more than once in the production process. It is important to note that there is a big difference between knowing how to build something and actually building it. The difference is that it requires human labor and tools other than the ones spent to learn how to build it. ## Models In the next pages, we will model the economy starting from the most simple model to the most complex one. [next](simple_robinson.html)