Models

I am attaching the model assignments. This is a very important skill to learn. I have not explained the art of modelling since it is a learning by doing process. Now I am going to explain a few things.

GROUPS: There is a reason for creation of groups. The IRON LAW of understanding. You do not UNDERSTAND any idea unless you can EXPLAIN it to someone else. We often fool ourselves, and think that I UNDERSTAND idea X. When you try to explain idea X to another person, you will find that what you thought was clear is actually very confusing. If you cannot express an idea clearly and explain it, then you do not understand it. The groups provide an opportunity to explain the model to each other in the process of working together to construct a model. This is also why I ask students to make presentations, because the process of explaining something to an audience creates understanding. Of course students can short-circuit this process by COPYING -- this involves taking ideas of others and presenting WITHOUT understanding -- Copying always implies failure of understanding because when you learn something then you own it and it comes from inside you, and then you cannot use words of others to explain. I do not have time to personally listen to all students explain their ideas to me, so I have created groups. MODELS are complex ideas, and therefore it is VERY IMPORTANT to present models. In fact, I would like groups to present models to each other, at a later stage.

CHANGING GROUPS: Groups of size three and four are acceptable. Five is NOT acceptable, but Two may be. I have tried to balance the groups by making sure that someone who did understand the first assignment was present in each group. If a group four wishes to subdivide into two groups of two, they may be able to pick up third partner by detaching one member from another group of four. Alternatively, groups of two may work with an ADVISOR to whom they must present the model and ask for feedback. Groups of size three may also get (optionally) an advisor. Groups of size four should have enough feedback available from within the group already. Choose an advisor from one of the stronger students in class, and of course, you will need to get his/her consent.

SOME BASIC IDEAS ABOUT HOW AND WHY TO CONSTRUCT MODELS:

There are some things that you INPUT into a model. These are RULES for Behavior of Agents - normally utility max or profit max or some other rule. There are INSTITUTIONAL STRUCTURES, which are social arrangements like property ownership, labor versus farmer roles, Hiring for wages (instead of musharka) and many others. Then there are market rules -- for example, in all our models we are using simple Supply and Demand to determine market prices -- Given quantity of corn Q and Money available to buy M price per unit will be Q/M and market will clear. Other possible rules are there, but we ignore alternatives for sake of simplicity.

Then there are OUTPUTS of the model. Once you put in the rules then YOU MUST COMPUTE the outcome. You cannot say XYZ happens as an outcome of the model, because the outcome should COME OUT OF CALCULATIONS based on the rules of behavior and institutional structures and market rules.

EXAMPLE: In the HAWK model, Laborers with surplus money lend to Unemployed. Here the amount they lend, and the terms on which the money is lent, should at least partly be an OUTCOME of the model, and not something dictated by rules as in input. This is because there is a market for credit supply and demand. So supply and demand can be determined as inputs to the model, and institutional rules for how lending takes place and how repayment takes place, can be part of the inputs. and the OUTPUT of the model should generate price (interest) and quantity of loans. Similarly, the PEACOCK model should have rules about where the extra land comes from, how it is acquired, paid for, prepared for cultivation. Then the quantity of investment should come out of DECISIONS made by farmers (or perhaps laborers could be allowed to borrow and invest in land as well). THe issue of what should be endogenous and exogenous within a model is a matter of judgment and experience.

Finally each model should be trying to achieve understanding of some BIGGER IDEA -- this is the META-IDEA of the model. For example, when we say 2+3=3+2 this is obvious fact of arithmetic. But the META-IDEA here is that it illustrates the commutative principle. Similarly, each model should be an exploration and an illustration of some BIGGER IDEA which lies BEHIND the construction of the model. I am attaching all the models and providing feedback on them on the webpage for this purpose. Pretend that your model IS the real economy and derive META-Lessons about what the model teaches us about the issue under study. This requires changing some things in the model and study the effects.

More detailed comments are given on the papers attached.

DOVES: Created a model with Job Sharing. Now read up on various proposals regarding work-sharing and job sharing. Start with the Wiki-Pedia Article: https://en.wikipedia.org/wiki/Job_sharing Consider the META-ISSUE of whether job-sharing can create welfare and prosperity. Your model shows that it can. Consider some variations, like how much is paid to workers for job sharing, how many can share, and what happens over time. Try to see if you can discover some bigger META-PRINCIPLES using your simple model.

EAGLES: Consider a model where government sets SUPPORT PRICES -- a minimum price at which the government will buy any surplus wheat. In the original model with excess supply, the farmers will not burn wheat, instead they will sell to the govt at the support price. But now the market price will be set AT the support price, insead of falling to zero. Consider the effects of changing levels of support price. Consider the META-QUESTION of whether support prices can increase social welfare -- providing better outcomes for everyone? This is not possible according to standard models of free markets and perfect competition.

FALCONS: Shortfall in Aggregate Demand can lead to unemployment. Your model does demonstrate this phenomenon -- I think there are some errors in calculation, but it should still work out after fixing these errors. The real issue (META-QUESTION) here is the one raised in my post on Keynesian Explanation of Unemployment: Seriously Incomplete The post explains that this will work for ONE PERIOD only. In the next period, the savings can be added to aggregate income and then demand will go back up to full employment. Explore variation of your model for two or three periods, with varying assumptions about SAVINGS, and how they are used, ROTATION among the employed and unemployed, and how the farmers assess aggregate demand. See how much unemployment you can create in what type of models.

HAWKS: A good model created by allowing the EMPLOYED workers to LEND money to the UNEMPLOYED. Think some more about the dynamics of lending and borrowing -- there should be some supply and demand and an equilibrium price at which the loan can be negotiated. You can use interest-based loans OR Qarz-e-Hasna (islamic). Go to two or three periods to see what happens when loans are repaid. You will have to think about how their is rotation among who is employed or unemployed. Do they go sequentially or do people randomly find jobs every period so everyone has 25% chance of finding a job. META-QUESTION here is about credit creation -- is this endogenous or exogenous. Show that your model supports endogenous money by showing that if you change number of laborers, the demand for loans changes and the supply of credit is driven partly by demand.Consider the issue of the interest rate which can be charged for loans and see if conventional theories of demand for money (and VELOCITY) can be supported or contradicted.

PEACOCKS: The idea of making it possible for landlords to INVEST in more land is interesting. It requires MORE WORK to specify details of how this would work. You could assume that it takes three workers one period to clear the land. Or that land is owned by the government, and is for sale. Then you have to think about how landlords can acquire surplus wealth to use for purchase of land - or alternatively how they can HIRE workers to clear the land so that it would be ready for use in the next period. The META-IDEA in these models would be to investigate how INVESTMENTS equals SAVINGS identity works. Is it that people SAVE in order to invest, or is it that the desire to invest creates savings.

SWANS: A good model where the villagers can EXPORT corn to the city. Allow for different kinds of prices at which export can be done. The way the model is setup it is possible for there to be two prices - a high domestic price and a low export price. The other way is not possible because profit max will force domestic price to be at least as high as the export price, otherwise farmers will export everything. Consider different scenarios of varying export prices and try to figure out some principles of how these export based INJECTIONS of money create surplus and how they drive the economy. The META-QUESTION is how exports affect the economy. Consider the standard theory of trade, and see how closely your model leads to results which are in line with standard theories, or against. In general you will see that exports DOES bring benefits, but does it benefit everyone in the society or just a few? Does this depend on price of exports or not? Can we change rules or social institutions to try to make trading improve welfare of everyone?