EPC v2

Employment, Production and Consumption
Model: Direct and proxy ownership
Hynek Lavička1
1 Department of Physics
Faculty of Nuclear Sciences and Physical Engineering

Czech Technical University in Prague
Czech Republic
May 18, 2011
Hynek Lavička () EPC Model May 18, 2011 1 / 35

Motivation
The model exhibits following

properties
Power-law firm size
distribution
Laplace firm size distribution
Laplace GDP growth
distribution
Log-normal firm demises
distribution
Exponential recession
duration distribution
Gamma-like firm
rate-of-profit distribution
Contents
1 Definition of model
Principles of the model
Actors of the model
Proxy ownership vs. Direct ownership
Commercial cycle
2 Results of simulations
Entropy of money
Direct ownership
Proxy ownership
3 Conclusions

Definition of model
Contents
Actors of the model
Commercial cycle
Entropy of money
Direct ownership
Proxy ownership
3 Conclusions

Definition of model Principles of the model
Contents
Actors of the model
Commercial cycle
Entropy of money
Direct ownership
Proxy ownership
3 Conclusions

The model is based on following principles:

1
Social stratification of the society
2
Circulation of money
3
Financial functionality of organizations
4
Redistribution of gains


1
2
3
4


1
2
3
4


1
2
3
4

Definition of model Actors of the model
Contents
Actors of the model
Commercial cycle
Entropy of money
Direct ownership
Proxy ownership
3 Conclusions

Actors of the model
There are two types of actors playing certain roles

in the model
AGENTS
Fixed number
Different social statuses
Consumers of goods
O RGANIZATIONS
Variable number
Distributors of gains
Producers of goods

Actors of the model

in the model
AGENTS
Fixed number
Consumers of goods
O RGANIZATIONS
Variable number
Producers of goods

Actors of the model

in the model
AGENTS
Fixed number
Consumers of goods
O RGANIZATIONS
Variable number
Producers of goods

Actors of the model

in the model
AGENTS
Fixed number
Consumers of goods
O RGANIZATIONS
Variable number
Producers of goods

Actors of the model

in the model
AGENTS
Fixed number
Consumers of goods
O RGANIZATIONS
Variable number
Producers of goods

Actors of the model

in the model
AGENTS
Fixed number
Consumers of goods
O RGANIZATIONS
Variable number
Producers of goods

Actors of the model

in the model
AGENTS
Fixed number
Consumers of goods
O RGANIZATIONS
Variable number
Producers of goods

Actors of the model

in the model
AGENTS
Fixed number
Consumers of goods
O RGANIZATIONS
Variable number
Producers of goods

Social stratification
Agents in the model are in one of these classes

E MPLOYERS (C APITALISTS )
E MPLOYED
U NEMPLOYED


E MPLOYED
U NEMPLOYED


E MPLOYED
U NEMPLOYED

Money circulate among the following entities

1
M ARKET
2
O RGANIZATIONS
3
AGENTS


1
M ARKET
2
O RGANIZATIONS
3
AGENTS


1
M ARKET
2
O RGANIZATIONS
3
AGENTS

Circulation of capital
Capital flows follow iteratively

1
Production of goods or services
2
Revenue by the market
3
Investment into the next production cycle


1
2
3


1
2
3

Distribution of gains
Revenues are distributed among

1
E MPLOYEES GET WAGES
2
I NVESTMENTS
3
E MPLYERS (C APITALISTS ) GET GAINS

Distribution of gains
Revenues are distributed among

1
E MPLOYEES GET WAGES
2
I NVESTMENTS
3
E MPLYERS (C APITALISTS ) GET GAINS

Definition of model Proxy ownership vs. Direct ownership
Contents
Actors of the model
Commercial cycle
Entropy of money
Direct ownership
Proxy ownership
3 Conclusions

Different types of ownership
The organizations are in reality managed by owner himself or via ma-

nagement.
Thus, we distinguish
1 D IRECT OWNERSHIP
Owner works for the company and he gets gains
2 P ROXY OWNERSHIP
Owner does not work for the company and the company is
organized through management and he only gets gains

Different types of ownership
The organizations are in reality managed by owner himself or via ma-

nagement.
Thus, we distinguish
1 D IRECT OWNERSHIP
Owner works for the company and he gets gains
2 P ROXY OWNERSHIP
Owner does not work for the company and the company is
organized through management and he only gets gains

Definition of model Commercial cycle
Contents
Actors of the model
Commercial cycle
Entropy of money
Direct ownership
Proxy ownership
3 Conclusions

Commercial cycle
Commercial cycle is a sequence of actions that must be ta-

ken by citizens and organizations to get benefit from the
market.
The commercial cycle have 5 steps
1 H IRING STEP (controlled by Thire )
2 R EVENUE STEP (controlled by Trevenue )
3 PAYMENT STEP (controlled by Twage )
4 F IRING STEP
5 C ONSUMPTION STEP

Commercial cycle

market.
4 F IRING STEP
5 C ONSUMPTION STEP

Commercial cycle

market.
4 F IRING STEP
5 C ONSUMPTION STEP

Commercial cycle

market.
4 F IRING STEP
5 C ONSUMPTION STEP

Commercial cycle

market.
4 F IRING STEP
5 C ONSUMPTION STEP

Evidence of exponential law of income

distribution in USA
Income distribution in USA

1
1996
1997
1998
1999
10-1 2000
2001
2002
1 2003
Gibbs-Boltzman fit
Fractile
10
-2 Pareto fit
0.5
0.2
10-3
0.1
10-4 0.05
104 5.104 105
3
10 104 105 106 107
Income per year in $

Evidence of exponential law of income

distribution in ČR
Income distribution in Czech Republic

1
Czech Republic (1-6, 2005)
0.5 Gibbs-Boltzman fit
Pareto fit
0.2
0.1 1
Fractile
0.05 0.9
0.02 0.8
0.01 0.7
0.005 0.6
6 103 104 1.4 104
104 2 104 5.104 105
Income per month in Kc

Results of simulations
Contents
Actors of the model
Commercial cycle
Entropy of money
Direct ownership
Proxy ownership
3 Conclusions

Results of simulations Entropy of money
Contents
Actors of the model
Commercial cycle
Entropy of money
Direct ownership
Proxy ownership
3 Conclusions

Entropy of money
We define total entropy of money as

" #
M i ( t ) Mi ( t ) Mj ( t ) M j ( t ) MM ( t ) M M ( t )
S(t ) = −k ∑ ln +∑ ln + ln
i∈C M M j∈X M M M M
and effective entropy of money is defined as
M C ( t ) MC ( t ) MX ( t ) MX ( t ) M M ( t ) MM ( t )

Seff (t ) = −k ln + ln + ln
M M M M M M

Phase transitions

Results of simulations Direct ownership
Contents
Actors of the model
Commercial cycle
Entropy of money
Direct ownership
Proxy ownership
3 Conclusions

Measured variables
Interesting variables of the model

Evolution of number of organizations
Entropy of money
Relative number of organizations
Number of bankrupted organizations
Total savings of population
Market size
Total amount of wages
Total consumption

Evolution of number of organizations
Evolution of organizations
0.25
Twage=25
Relative number of organizations
Twage=51
0.2 Twage=90
0.15
0.1
0.05
0
0 400 800 1200 1600 2000
Timestep
Variables of the model (1)

Total Entropy Relative Number of Bankrupted Organizations
5.5
.08
Ratio of Bankrupted Organizations
.06
5
Total Entropy
4.5
.02 .04
4
3.5
0
20 40 60 80 100 120 20 40 60 80 100 120
Temperature of wage Temperature of wage
Relative Market Size Relative Number of Unemployed
.4
.65
.3
.6
Ratio of Unemployed
Ratio of Market Size
.2
.55
.1
.5
.45
20 40 60 80 100 120 20 40 60 80 100 120


Variables of the model (2)

Relative Savings of All Citizens Relative Wages
.35
.5
Ratio Savings of All Citizens
.45
.3
Ratio of Wages
.4
.25
.35 .3
.2
20 40 60 80 100 120 20 40 60 80 100 120
Relative Number of Organizations Relative Consumption

.2
.5
.15
.45
Ratio of Organizations
Ratio of Consumption
.1
.4
.05
.35 .3
0
20 40 60 80 100 120 20 40 60 80 100 120


Results of simulations Proxy ownership
Contents
Actors of the model
Commercial cycle
Entropy of money
Direct ownership
Proxy ownership
3 Conclusions

Results of simulations Proxy ownership
Variables of the model
Relative Savings of All Citizens Relative Wages R
.06
.5
.4
.4
Ratio Savings of All Citizens
.3
Ratio of Organizations
.04
Ratio of Wages
.3
.2
.2
.02
.1
.1 0
0
20 40 60 80 100 120 20 40 60 80 100 120 20 4
Relative Number of Fired Employees

.025 .02
Ratio of Fired Employees
.005 .01 0 .015
Hynek Lavička () 20 40 60 EPC Model80 100 120 May 18, 2011 29 / 35

Temperature of wage
Conclusions
Contents
Actors of the model
Commercial cycle
Entropy of money
Direct ownership
Proxy ownership
3 Conclusions

Conclusions
Physical conclusions
A model based on direct observation of its function of

economy, with 5 consecutive steps describing economic
production
We observed phase transition in both (Direct ownership and
Proxy ownership) models varing temperature of wage (Twage )

Conclusions
Economic conclusions
Our findings suggest that socio-economic production

mechanism is non-linear process
We found 2 phases separated by transition. 1st phase for
Twage < TC = 50 can be called pseudo-monopolistic phase. The
phase have no unemployment, high volume of savings and
high consumption
In case of proxy ownership, 2nd phase is dead economy!
In case of direct ownership, 2nd phase is market economy
with high number of organizations, there is a lot of bankrupt
organization and high employment rate.

Conclusions
Take-home message
Higher wages does not necessary lead to

higher total wages!
Transform all proxy owned organizations to
direct owned organizations - owners should
participate in production cycle of an
organization.

Conclusions
Cooperators
JAN N OVOTÝ - FNSPE, CTU in Prague; CERGE-EI,
Charles University
T OMÁŠ L ICHARD - CERGE-EI, Charles University
L IN L IN - Department of Economics, University of Kiel

Conclusions
Literature
L AVI ČKA , H., L IN , L., N OVOTNÝ, J., Employment, Production and Consumption
Model: Patterns of Phase Transitions, Physica A 389 (2010) 1708-1720.
VON N EUMANN , J., AND M ORGENSTERN , O., Theory of Games and Economic
Behavior, Princeton University Press, 1944.
S TANLEY, H. E., AND M ANTEGNA , R. N., An Introduction to Econophysics,
Cambridge University Press, 2000.
W RIGHT, I., The Social Architecture of Capitalism, Physica A 346 (2005) 589-620.
D RAGULESCU, A. A., AND YAKOVENKO , V. M., Statistical Mechanics of Money,
Eur. Phys. J. B 17, 723 (2000).
L IN , L., unpublished papers on EPC model.

EPC v2

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Employment, Production and Consumption

Model: Direct and proxy ownership

Faculty of Nuclear Sciences and Physical Engineering

May 18, 2011

Hynek Lavička () EPC Model May 18, 2011 1 / 35

The model exhibits following

Hynek Lavička () EPC Model May 18, 2011 3 / 35

Hynek Lavička () EPC Model May 18, 2011 4 / 35

Hynek Lavička () EPC Model May 18, 2011 5 / 35

Principles of the model

The model is based on following principles:

Hynek Lavička () EPC Model May 18, 2011 6 / 35

Principles of the model

The model is based on following principles:

Hynek Lavička () EPC Model May 18, 2011 6 / 35

Principles of the model

The model is based on following principles:

Hynek Lavička () EPC Model May 18, 2011 6 / 35

Principles of the model

The model is based on following principles:

Hynek Lavička () EPC Model May 18, 2011 6 / 35

Hynek Lavička () EPC Model May 18, 2011 7 / 35

Actors of the model

There are two types of actors playing certain roles

Hynek Lavička () EPC Model May 18, 2011 8 / 35

Actors of the model

There are two types of actors playing certain roles

Hynek Lavička () EPC Model May 18, 2011 8 / 35

Actors of the model

There are two types of actors playing certain roles

Hynek Lavička () EPC Model May 18, 2011 8 / 35

Actors of the model

There are two types of actors playing certain roles

Hynek Lavička () EPC Model May 18, 2011 8 / 35

Actors of the model

There are two types of actors playing certain roles

Hynek Lavička () EPC Model May 18, 2011 8 / 35

Actors of the model

There are two types of actors playing certain roles

Hynek Lavička () EPC Model May 18, 2011 8 / 35

Actors of the model

There are two types of actors playing certain roles

Hynek Lavička () EPC Model May 18, 2011 8 / 35

Actors of the model

There are two types of actors playing certain roles

Hynek Lavička () EPC Model May 18, 2011 8 / 35

Agents in the model are in one of these classes

Hynek Lavička () EPC Model May 18, 2011 9 / 35

Agents in the model are in one of these classes

Hynek Lavička () EPC Model May 18, 2011 9 / 35

Agents in the model are in one of these classes

Hynek Lavička () EPC Model May 18, 2011 9 / 35

Money circulate among the following entities

Hynek Lavička () EPC Model May 18, 2011 10 / 35

Money circulate among the following entities

Hynek Lavička () EPC Model May 18, 2011 10 / 35

Money circulate among the following entities

Hynek Lavička () EPC Model May 18, 2011 10 / 35

Capital flows follow iteratively

Hynek Lavička () EPC Model May 18, 2011 11 / 35

Capital flows follow iteratively

Hynek Lavička () EPC Model May 18, 2011 11 / 35