Monthly Archives: October 2015

The Economics Simulation Project – Part 2

In preceding posts, I complained about the various schools of economics basing their theories on different parts of clouds and complained that there was little empirical evidence to support their theories. All of which led to the Economics Simulation Project using Avian Computing and ConcX instead of using assumptions and math formulas that normally produce the results needed to support their initial assumptions.

Economic simulations based on formulas are generally unsuccessful because formulas are solved one math chunk at a time and the value(s) determined by each chunk is applied to other chunks of the formula, normally in the same order. Each part of the formula is the manifestation of the assumptions of the authors. And if the results don’t match the desired outcomes, the formula is “tweaked” until it produces the desired outcome. But in the course of tweaking to make the desired outcome, they lose their generality and can only answer one set of conditions and assumptions and produce less useful answers for other conditions and assumptions.

Because ConcX was designed to be multi-threaded and to respond asynchronously to inputs, it more naturally models the complex interactions of consumers and vendors encountered in the real world than formulas. Instead of trying to build a formula that describes consumer expenditures, each individual and consumer in the Avian Economic Simulation has a salary that they spend buying the stuff they need to live; food, shelter, clothing, etc. They have a hierarchy of needs so they buy the most important stuff first. They buy goods and services in typical amounts for the various categories that comprise the standard “market basket” identified by the Bureau of Labor Statistics (BLS). Things that they cannot buy are recorded as skipped so that the total amount of unfulfilled economic activity can be estimated.

Initially, only Consumers (Consumer Units) make expenditures. Consumers are representatives of the five income quintiles of American society and have salaries and make expenditures according to their salaries. The sum total of all Consumer purchases is the “C” in the following GDP equation:

Y = C + I + G + (X − M), where Y represents the sum (GDP) of C (consumer expenditures) + I (Investment) + G (Government spending) + Net Exports (Exports – Imports).

When the Consumers for 5 quintiles are configured correctly, the amount of their expenditures should be equal to the “C” amount in the GDP equation. We should be able to verify that this amount correlates to the actual amounts of consumer expenditures for that year in history.

But that isn’t really satisfactory because we know that people have unforseen events in their lives, events that aren’t captured by the quintile Consumers. Eventually, “Individual” consumers will also participate in the simulated economy, individuals who will suffer the ups and downs of living in an economic world. Each Individual may endure difficult life events, such as unemployment, health problems and bad business investments. Each Individual may also have blessings such as getting married and having babies,

Once Individuals are available, the Economic Simulation will be made available on the internet. People will be able to create an Individual who will be configured to make personal buying decisions (Name brand vs store brand, latest most popular vs last year’s model, stylish vs functional) and then see how that Individual performs in the simulated economy. Not only will it be interesting to see who gets rich and who becomes poor, it could also be a useful tool for high school students considering how their current choices could affect their futures.

More in the next blog

The Economics Simulation Project – Part 1

LafferCurve1

Std Laffer Curve

LafferCurve2

Equally Valid Possible Laffer Curve

While discussing the pros and cons of the Laffer Curve (at times a bit too loudly), I realized a basic problem with the standard Laffer Curve Diagram as it is normally shown; it has no numbers along the axes, which means that the chart is purely conjectural and any relationship to the actual economy is purely coincidental. And there is no way to prove that the usual shape of the Laffer Curve is more (or less) accurate than the curves shown in the second image or third image. Without hard numbers and actual research being done, there’s no way of determining the shape of the curve and therefore it is impossible to develop a tax policy that optimizes collection of tax revenue. So instead doing research, they did what economists do best, they made assumptions and then threw a lot of fancy math equations and “proved” what they already believed.

LafferCurve3

Another Potentially Valid Laffer Curve

At which point, it occurred to me that what is really needed is some kind of empirical evidence instead of theoretical conclusions. Economics, as currently practiced, is taught and discussed using basic assumptions that are never tested or proven and many times seemingly unreasonable. In fact, Milton Friedman, the driving force of the Chicago School of Economics that forms the bedrock of the free market beliefs in favor today stated in no uncertain terms that the assumptions used when discussing economics did NOT have to be realistic or applicable to the real world. Apparently economics has triumphed over GIGO (Garbage In, Garbage Out).

If only there was some way to simulate the American economy and get empirical results, instead of theorizing  . . .

Many have worked on simulating economies before, but as best I can tell, they start by turning their assumptions into math equations and when they are finished running their equations, they have “proved” exactly what they assumed in the beginning. Which allows others to make different assumptions into different equations and generate totally different results. It’s not a very satisfying solution.

The EconoSim Project

Which is where the Concurrency Explorer (ConcX) and Avian Computing come in. Instead of trying to build formulas and equations that mimic human behaviors, ConcX birds can be developed that buy stuff and spend money in ways that generally mimic the way that actual consumers and businesses and governments do. So far, Consumer birds have been developed that “earn” salaries and pay expenses (food, clothes, medicines, rent or mortgages, transportation, etc). Because each Consumer has a budget (based on their earnings) and expenses (again based on their earnings), it becomes possible to identify and track where their money is spent over the years. Perhaps more importantly, Consumers also track where they didn’t spend money, making it possible to precisely estimate how much economic activity was subtracted from the GDP.

In addition to Consumer birds, Vendor birds collect the purchase payments that the Consumers make while Government birds collect taxes that they Consumers pay on their income and purchases.

For a typical run, a different Consumer bird is setup to represent each quintile (20%) of American society. Additional Consumers can be setup with any levels of income or expenses desired. The decision to categorize Consumers by quintile is based on the data that is most readily available.

Data Sources

The data for salaries and expenses are based on data collected by the Bureau of Labor Statistics going back to early 1980’s. Additionally, the percentage spent on each category of expense is also available. Income and poverty data from US Census Bureau is also used, as well as reports generated by the Congressional Budget Office (CBO).

There are several reasons for going back only to the early 1980’s. Primarily and most pragmatically, the data prior to the 1980’s is structured significantly differently, requiring a major effort on the part of yours truly to make the early data usable. But there is another reason. Inflation was rampant in the 70’s and early 80’s, disproportionately affecting different categories, making it more difficult to use the data before 1984-ish.

Consumer Expense Categories

Consumer expenses are based on the same representative basket of goods and services purchased by consumers each month used to calculate the Consumer Price Index (CPI). This data is collected monthly by the Bureau of Labor Statistics (BLS) and is publicly available on their website. There are literally thousands of items in the basket whose prices are tracked from month to month in locations all across America. These individual prices are then put into eight major categories:

  • Housing
  • Food and Beverage
  • Apparel
  • Transportation
  • Medical
  • Recreation
  • Education and Communication
  • Other

By following these same categories in the Consumer birds, we are able to leverage the data made available by the BLS as well as significantly reduce the number of assumptions that need to be made to estimate consumer expenses (I know that many of my initial assumptions about expenses were wrong, based on the amounts & percentages provided by the BLS).

Using this publicly available data also ensures that any others who attempt to simulate the economy have a common starting point for their simulations or analyses. Using common data allows other projects analyzing or simulating the economy to make direct, apples to apples, comparisons.

More in the next blog

Elephant Economics

While thinking about Cloudy Economics, I remembered the story of the seven blind men who were asked to describe an elephant. They were each led to a different part of the elephant and allowed to touch the elephant.

BlindMenElephant

“Elephants are like big tubes that wiggle around, with a wet end that air goes in and out of,” proclaimed the first, holding the trunk.

“No, elephants are like smooth, hard tubes, and kind of pointy on the end” stated the second, holding onto a tusk.

“No, elephants are more like flexible fly whisks,” said the third, holding onto the scraggly hairs of the tail.

And so on. They were each right about the part of the elephant they were touching and wrong about the elephant as a whole. And this goes a long way towards capturing the idea of Cloudy Economics, and doing so in a more colorful and accessible way.

What elephant economics doesn’t capture, however, is the interdependent and dynamic nature of Cloudy Economics. If the blind man holding the tail were to pull that tail, it wouldn’t affect the size or behavior of other parts of the elephant (although if he pulled hard enough, it might change the location of some elephant parts, such as where the head and tusks were located as it swung around to see what was happening at his tail end).

In clouds, depending on the situation, could have one portion that starts to rain, and the act of raining affects the environment of the surrounding portions causing them to also start raining when they wouldn’t have otherwise rained. This is the dynamic interdependent nature of clouds that makes it a more appropriate model for economics than the blind men and the elephant.