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Economic Simulation Models

© Adam Hughes

We've spent the last couple of weeks discussing economic models and, more specifically, the Bionomics model of economy. In brief, this model holds that any economy is more accurately viewed as a "living" system, like an ecosystem, than as a machine. As such, economies under this model fall subject to the principles of biology rather than being constrained by the laws of classical physics. This discussion has served as a good introduction to the basic thought processes involved in simulating an economic system. We will now begin to look at some actual economic simulation methods in use today and what they yield in terms of economic scenarios.

One of the more basic economic simulations that can be carried out is the game which allows the player to run his own lemonade stand for the summer. I can clearly remember playing this type of game on the first "personal computer" I ever owned, back in the early 1980's (the computer was crude, to say the least, and the "monitor" was simply my TV screen).

In this type of simulation, you are given a report at the beginning of each "day" which details the weather conditions, your supplies inventory and the amount of cash you have to work with. You must then determine what to buy, if anything, for that day's business transactions and the price to charge for a cup of lemonade.

This type of simulation is very straightforward and simplistic. If it's a hot day, you're pretty well assured of selling a lot of lemonade. If you raise the price too high, sales drop dramatically. In brief, this is the traditional economy-as -a-machine model, where physics takes over and a set of actions leads to a set of predictable outcomes, or reactions. This model doesn't take into account consumer moods (other than heat comfort/discomfort), local competition, overall economic health, etc., etc., etc.

On the other hand, a more realistic and organic, though still simple, simulation can be seen in the Tradebot Simulation described on the Bionomics web site (http://www.bionomics.org/text/cbr/tradeb... This simulation involves some number of "fiefdoms" interacting with each other through wars and money exchanges. It considers such intangibles as the "meanness" of the fiefdoms, the perception of this meanness by other fiefdoms and the strengths and weaknesses of the fiefdoms. The Bionomics folks see the Tradebot Simulation as a good place to start in attempting to understanding economic modeling and simulation in general.

Over the next few weeks, we'll look at other methods of economic simulation.