Value of System Dynamics

I've found that a lot of people are skeptical towards system dynamics as a method. I also have a hard time explaining what it is, especially in comparison with other modeling methods such as conventional economic modeling because I don't really know much about other modeling methods.

One common criticism is that it is too subjective because system dynamics models can accommodate subjective variables such as level of material well-being or crowding. While system dynamics can be used to model completely physical systems where we already have a pretty good understanding of the dynamics, such as a pendulum, it is more often used for modeling social systems such as the organization of a business or the urban population.

It seems that many other systems models for engineering and economics are geared towards having inputs and getting outputs. For example, how many kW should each generator on the grid be supplying, how much profit does the company expect this quarter, what percent of the profit should be spent on R&D, etc. The power of system dynamics, in contrast, is not in the accuracy of getting numerical answers, but rather in gaining understanding of the dynamics of a complicated system. A system dynamics model can help users find out the causality of different outcomes, what actions have the most leverage, and what behaviors are just symptoms. I still feel there is a lot of potential for system dynamics, but I am trying to maintain a critical attitude to better understand its limits and differences from conventional models.

Energy Talk at MIT with Sterman

This is from last year IAP, actually. John Sterman, the system dynamics guy is the moderator, and Harvey Michaels is a speaker along with some other people I'm not that familiar with yet. Through this, I found some interesting companies.

XENERGY

Environmental Law Institute

and also driving to work today, I saw Alteris Renewables

C-ROADS

The latest system dynamics model for the climate, energy, and the economy is C-Roads. All the leaders in system dynamics are involved: John Sterman, Tom Fiddaman, people at the Sustainability Institute, and others. Their website is the http://climateinteractive.org/ and their blog is http://climateinteractive.wordpress.com/

Sustainability Resources

http://www.sustainer.org/ Sustainability Institute founded by the late Donella Meadows, a system dynamics modeler.

Urban Dynamics Review : Part Four

Part Four - Applications to Urban Policy Design

Self-Learning Revival Policies in Urban Dynamics by Nathaniel Mass
The policy response can vary with the dynamically changing parameters of the system. "We will introduce a 'self-learning' revival policy," which is like a compensator in an electrical circuit. In urban dynamics, the rates of slum demolition and the incentives for new enterprises are adjusted each year according to the new parameters of the system.

"This policy is a fairly simple example of an engineering 'integral controller.'...The concepts of system sensitivity developed in this paper apply to a very broad class of systems. Frequently, changing parameter values in a social system can 'shift the mode of operation so as to affect the design of new policies.' A careful search for such influential parameters should accompany any policy design effort. Once an influential parameter has been identified, the analyst should look for ways to make the system insensitive to that parameter."

Control of Urban Growth by Jay W. Forrester
Forrester suggests some policy tools to implement solutions from urban dynamics models.

Money - "The trend toward interpreting urban problems as a financial demand on higher levels of government must be reversed. Higher levels of government can be most effective by exerting pressures for local action, by altering the tax policies that encourage the perpetuation of old buildings in declining urban areas, and by reversing the policies that favor housing over jobs so that residential construction will no longer rise beyond the economic population-supporting capacity of the area."

Tax Laws - "The aging of buildings is an intimate part of the urban decline process. the shifting of taxes from real estate to incomes means that the old buildings and the land they occupy need not be used effectively; then can be allowed to decay with little tax penalty."

Population Density - "Population densities in both residential and commercial zones are allowed to rise in response to the fallacious argument that rising land prices require more intense use...we allow a land-price-population-density spiral to continue until excessive loads are thrown onto transportation, pollution, psychological trauma, and other factors of the urban environment."

Zoning - "Zoning as in the past divided land into blocks that are too large and too homogeneous that deteriorates as a whole into a substandard condition avoided by new construction to become a slum. Too much area is also zoned for residential use compared to industry. The failure to zone so that only forest and agriculture are allowed in rural areas immediately adjacent to urban areas permits urban sprawl to develop and removes the necessity to rebuild and reuse the aging urban areas."

Selected Stresses - "We must cherish and preserve the pressures that go with the chosen style of urban environment."

Realistic Goals - "We must contemplate realistic urban goals that include negative forces powerful enough to limit population and population density."

Control of Urban Growth by Jay W. Forrester
"This was presented as the keynote address to the meeting of the American Public Works Association in Minneapolis, Minnesota, Sept 25, 1972." Forrester makes a case for why technology in the form of more road infrastructure, sewage, and electrical wiring cannot solve the problems in a city without limiting the population density. Also, exponential growth cannot continue forever.

"Growth has continued past the point where suboptimizing is satisfactory. Suboptimizing means the meeting of a local goal without attention to consequences in other parts of the system. During the past period of our industrial growth, the various facets of the technical-social-economic system were sufficiently uncoupled that suboptimizing was a satisfactory procedure for decentralization. Suboptimizing allowed different groups to pursue their own ends independently, with confidence that the total good would thereby improve.

"I see no solution for urban problems until cities begin to exhibit the courage to plan in terms of a maximum population, a maximum number of housing units, a maximum permissible building height, and a maximum number of jobs.

"A city affects its local choice between quantity and quality mostly by how it handles the diffuse versus the compartmentalized components of attractiveness. The objective should be to maximize the diffuse characteristics of the city in order to improve the quality of urban life while controlling the compartmentalized characteristics in order to prevent the expanded population that would defeat the improvement for present residents. The diffuse characteristics, such as public safety and clean air, are shared equally by all...and they apply alike to present residents and those who might move in. The compartmentalized characteristics of a city, like jobs and housing are identified with particular individuals; they can be possessed by present residents but are not necessarily available to others."

Lowell Dynamics: Preliminary Applications of the Theory of Urban Dynamics by Walter W. Schroeder
The Urban dynamics modelers worked with the city of Lowell to discuss the biggest problems and make policy recommendations. There were nine "biggest" problems: unemployment, parking, transportation, taxes, city revenues, education, housing, crime protection, code enforcement, and federal and state controls.

They consider the two leading suggestions by the Lowell planners, which are to demolish the Mill and to impose a service tax plan on currently untaxed property. The analysis showed that demolishing the mill would be expensive, and one alternative would be to convert existing "large plant facilities to several smaller industrial condominiums...small-scale development would make it financially possible for small, young firms to locate in these structures. Since the condominiums would be organized such that none of the units could be demolished without the consent of the other occupants, the threat of forced relocation in the near future would be significantly reduced." The system dynamics analysis discourages the service tax plan. The problem is that more and more money will always be perceived as necessary.

Some really interesting results and policy recommendations had to do with land assessments, taxes, and zoning. One problem is that residential buildings are assessed at a lower value than commercial and industrial buildings so that businesses pay more taxes than the homeowner. This drives the trend towards excess housing.

Similarly, homeowners end up paying higher taxes than renters because of tax rules, and thus the area is trending towards higher-density living. The buildings then deteriorate faster because there is less incentive for the renter or landlord to maintain the facilities.

The authors recommend reducing the stock of substandard housing because "aged housing contributes little to the city's tax base or to its socioeconomic vitality." It would be best if landlords demolished or renovated their old buildings voluntarily. This can be done by limiting tax abatements that the city grants to owners of old buildings. "Should the owner fail to demolish, at least the more rapid buildup of back taxes would warrant the city taking a lien on the property before it loses all of its market value."

They also recommend reducing reliance on federal assistance for subsidized housing. Zoning can also help to create a healthy balance between residential buildings and commercial buildings.

Urban Dynamics Review : Part Three

Part Three - Model Alterations

Structural Changes in Urban Dynamics: Housing Obsolescence and Housing Demand by Nathaniel J. Mass
This explores a reformulation of the rate of housing-obsolescence saying that it should be slowed by an excess of housing in the next lower category of housing quality. However, after running some simulations, Mass shows that the result is the same.

Modeling City-Suburb Interactions by Alan K. Graham
The urban dynamics model assumes that people live and work in the same city, not accounting for commuting. The conclusion is that the additions to the model do not impact the recommendations.

Two Modifications to the Tax Sector of Urban Dynamics by Michael R. Goodman
Forrester's urban dynamics model applied outside funding to new programs in a city. One modification could be that outside funding would only go towards paying down the debt, "a revised financial aid subsidy program." This does result in an improvement in the Tax per capita radio, Tax ratio needed, and the Underemployed to labor net.

Another modification could be to change the tax needs per person such that they "increase with progressively higher local unemployment rates, and conversely." However, there is no difference in the results after this is implemented partly because this is already incorporated into the old model although not explicitly.

A Dynamic Model of Land Pricing and Urban Land Allocation by Nathaniel J. Mass
The Urban Land Market is incorporated into the Urban Dynamics model. This also did not have a significant impact on the results. However, this analysis can help city planners with determining appropriate zoning policy. "Zoning policy would need to be combined with other policy measures designed to control urban population."

Adapting Urban Dynamics to Lowell by Walter W. Schroeder III and John E. Strongman
Here is some analysis about whether the urban dynamics model accurately describes Lowell, Massachusetts. They conclude that it can, and that it can help design policy for urban renewal.

Urban Dynamics Review: Part two

Part two - Conceptual Issues

Aggregation and Definition: The Underemployed, A Case Study by Michael R. Goodman
The underemployed in Forrester's Urban Dynamics model is not the same as defined by census data. We have to be careful about definitions.

Business Structures and Economic Activity in Urban Dynamics by Nathaniel Mass
Some clarifications about business construction. "New-enterprise buildings are constructed predominantly by established firms that are expanding their production capacity and employment levels" not start-up ventures. Actually, young firms are usually in declining-industry structures. "New enterprise structure may be either newly constructed or newly renovated, as long as...employment densities in the building are comparatively high, and the building's tax contribution to the city is large because of its high assessed value."

Turnover in a building happens for several reasons. One is that "changing technology imposes changing requirements for headroom, floor weight capacity, power, and lighting, and work-flow patterns. Turnover rate also depends on...the business climate within the community, taxes, labor, and manager availability, and the socioeconomic character of the urban area...High business turnover rates promote rapid obsolescence of industrial structures because new owners often use the space less efficiently, employee density decreases, and the building becomes more technologically obsolescent."

Dynamic Migration Models by Michael W. Laird
This contrasts the systems dynamics model for migration with the conventional model for migration, which is the gravity model. The main difference is the calculations for attractiveness that are dynamic. The gravity model implies that migration depends only on the sizes of the populations and the distance between places. It mentions the work of I. S. Lowry, who includes an attractiveness factor, but it is not dynamics, although he notes the feedback nature of attractiveness.

Issues of Empirical Support for the Migration Formulations in Urban Dynamics by Michael R. Goodman and Peter M. Senge
This article is interesting because it discusses some difficulties in measuring correlation in real empirical data, making it difficult to verify the causal links in system dynamics models. It discusses four issues.

1. Limitations on inferences which can be drawn from statistical techniques in the face of the restricted time span and range of existing migration data
2. Problems in interpreting parameter estimates derived from cross-sectional data analysis
3. Difficulties in estimating nonlinear relationships containing significant time delays
4. Problems in drawing statistical inferences regarding the error process of a continuous dynamic system.

Metropolitan Population growth, Land Area, and the Urban Dynamics Model by Wilbert Wils
Wils compares the urban dynamics model with actual data of population growth in Massachusetts where "vigorous expansion initially occurs in the central city, but growth later moves outward to the periphery of the city where population densities are lower." This result almost seems like common sense. One distinction from other theories, though, is that in the urban dynamics model, urban decay in the central city precedes expansion rather being caused by expansion.

Urban Dynamics and Its Critics by Louis Edward Alfeld
This is mainly a defense of urban dynamics. Most critics focus on the specific recommendations without addressing fixes to the model with most criticism directed at how the recommendations are bad for the poor and how there is not enough empirical data.

Understanding Urban Dynamics: An Analysis of Garn's Interpretation by Alan K. Graham
This is a response to analysis and criticisms of Harvey Garn of the Urban Institute. Garn was concerned that the urban dynamics recommendations might just be keeping the poor out, make the city better but the nation worse, and that the model neglects the impact of the city-suburb interaction.

Urban Dynamics: Book Review

I finished reading a book on Urban Dynamics, which is a system dynamics model of cities originally by Forrester.

Readings in Urban Dynamics : Volume I
edited by Nathaniel Mass, 1974

Even though I didn't read Forrester's original paper, these readings fill me in about the most important aspects of the model and also resulting controversies. I'm going to summarize most of the articles.

Part One - Overview
Managing Our Cities - Can We Do Better? by John F. Collins
John F. Collins was the former mayor of Boston and afterward became a consulting and visiting professor at MIT, so it's interesting to hear his perspective. His main points are that the problems of poverty, inadequate housing, crime, unemployment, and overcrowded transportation systems in cities do not simply lack money. It is impossible to build a "perfect city" because of the "attractiveness principle" in Urban Dynamics. Basically, a city that is universally more attractive compared to its environment attracts people who move in and overload the city's amenities. Cities therefor need to cater improvements towards its residents and seek to be distinct from other cities so that it's not attractive to everyone. Cities at the time (I don't know about today) were becoming more alike. Instead cities could specialize and become resort cities, manufacturing cities, educational, or educational cities, etc.

System Analysis as a Tool for Urban Planning by Jay W. Forrester
Managerial, urban, and economic systems are nonlinear complex systems. Forrester summarizes the Urban Dynamics model he came up with.

"Nine levels are groups into three subsystems. The industrial sector contains commercial buildings in three categories distinguished primarily by age. Across the center are residential buildings in three economic categories of population. Across the bottom are three economic categories of population...The age of a building tends to determine the character of its occupants. A new commercial building is occupied by a healthy, successful commercial organization that uses relatively more managers and skilled workers than unskilled workers. As the building ages, it tends to house a progressively less successful enterprise with lower employment skills. In addition to the changing employment mix as the industrial building ages, there is a tendency for total employment per unit of floor space to decline. On the other hand, as residential buildings age, there is a tendency for occupancy to increase as well as to shift to a lower economic category of population. One then perceives a condition in which the aging of buildings in an urban area simultaneously reduces the opportunities for employment and increases the population. The average income of the community and standard of living decline."

new enterprise - mature business - declining enterprise
premium housing - worker housing - underemployed housing
managerial professional - labor - underemployed

Forrester recommends reducing slum housing by about 5%/year and putting in incentives for new enterprise. According to his models, in the long run, this will produce a reduction in the underemployed to job ratio and the tax ratio needed.

Understanding Urban Dynamics by Gerald O. Barney
Barney clarifies some subtleties in the model. "The urban system is an example of a 'complex system' - a system whose behavior is dominated by multiple-loop, nonlinear feedback processes."

Forrester's solutions have two criteria : must be lasting (decades) and must increase upward mobility of underemployed.

Forrester's proposal of demolishing slum housing just seems like making a place richer by reducing the number of poor people. In a sense that is the solution because the problem is that there is too high a percentage of underemployed and not enough wage earners to generate tax revenues needed for the city to provide amenities to the residents. However, his solution ultimately benefits the underemployed because attracting new enterprises and jobs increases the number of underemployed that the city can support, and it also improves upward mobility so the quality of life for the city's underemployed is improved.

"In actual practice, [current urban programs] generally have a similar and characteristic development pattern: an initial period of slight improvement and generation of hope, followed within a few years by readjustments within the urban system that result in a loss of gained ground. The net result has been increased concentrations of underemployed, continually decaying conditions, and growing hostility of the underemployed toward the 'System' and toward the 'Establishment' that they think controls the 'System.' Actually...the failure of our urban programs is due not to the control of the establishment, but rather to a collection of feedback processes that are at work within the system and are almost beyond the influence of the establishment."

"Urban renewal (as practiced in the fifties) and the relocation of underemployed in low-rent suburban housing have destroyed communities and transplanted the underemployed to new locations where they are needed and wanted no more than they were before the relocation."

A Systems Approach to Urban Revival by Louis Edward Alfeld and Dennis L. Meadows
They mention the that many people have been migrating to California, and now it is becoming a less attractive place to move to. It's interesting that they said this in the 74 since I'm pretty sure in-migration has continued and still continues although now they really have a massive budget and water crisis.

"Schools and other city services become overloaded, available job opportunities decrease, recreational facilities become crowded, travel becomes difficult, and natural beauty is continually despoiled by an expanding population."

This article then goes into a little bit more technical detail about the urban dynamics model and solution. It depicts the feedback loops with in-migration and housing availability, feedback loops with job availability and migration, and feedback loops with revenue needs, migration, and housing construction.

Technology and Public Policy Essay

Prompt: In this supplement, we would like you to articulate your reasons for studying technology and policy at MIT - to someone who is not acquainted with the field.

There are many challenges facing the nation and the world today that need to be met to provide a high standard of living for a growing global middle class without depleting the very resources required to do so. In other words, our way of life needs to be environmentally sustainable. In order to achieve this vision, we need new technology. We may also need to change human behavior through effective policies for things such as business practices and land use. System dynamics is a field that is developing and using rigorous analytical tools for designing policy. I’m interested in studying system dynamics, technology policy, and the economy to help transition to an environmentally sustainable way of life. MIT is the leader in the field.

The way we generate and use energy needs to transition from a system that is contributing to the accumulation of carbon dioxide and other pollutants into the atmosphere to one that has zero net impact on the environment. We need sources of energy that will not be depleted faster than they are consumed. New technology is currently being developed for alternative sources of energy as well as more efficient usage of energy. On the other hand, some goals such as lowering demand for energy can be reached with policy solutions that change behavior. New technologies need to work in concert with these policies. Otherwise, more efficient appliances may be followed by an increase in the number of appliances used, wiping out any potential reductions in energy consumption.

Developing new technology is resource intensive, requiring a large amount of capital, time, and manpower. One prominent theory for the best way to prioritize technology development is that the free market automatically selects for the best ideas and allocates resources the most efficiently. This is often touted as the main advantage of capitalism, minimizing the need for policy and planners. However, ideas can only be sorted by quality if the quality is correctly correlated with the price, and environmental and social impacts are often not included in the price of development or consumption of products. It can be hard to gauge the effectiveness and thus value of a new technology because it can be hard to identify causal links, especially when there are delays in the system. That is why it is difficult for the market to prioritize effectively. In practice, there are many government programs and a variety of tax incentives in an attempt to correct for the free market system.

Alternatively, analytical tools can be used to prioritize technology development and policy implementation. The system dynamics field develops and uses analytical tools to model systems such as the energy sector to determine the causal links of the system. These mathematical models can then be used to simulate the effects of different policy implementations or new technologies on a computer. If relative impacts, especially long term impacts, of potential innovations or policies could be quantized, it would be a very effective way to prioritize resource allocations for new technology. Then, better policies can be made for city and national planning by combining new technologies with a model of the economy. What system dynamics can reveal about the causes of economic growth and recession will be critical. With a better understanding of the system, policies can be optimized to complement each other rather than inadvertently canceling out each other's intended effects.

Many people have worked on system dynamics models for energy, the climate, and the economy. System dynamics was founded at MIT by a former electrical engineer, Professor Jay Forrester in the 1960s. These modeling techniques are not yet widely practiced in policy-making, which is a challenge, but MIT continues to be a leader in this growing field. MIT alumni developed Vensim, the leading software for system dynamics modeling, and they continue to collaborate with ESD and the Sloan School on research and education. Professor John Sterman does research on energy policy and environmental sustainability and has developed many tools for policy-making. The ESD program has collaborative research projects using systems analysis to evaluate and develop technologies for wind power and carbon sequestration.

There is an especially rich discussion about new technology and public policy at MIT because MIT is at the cutting edge of research for new technologies such as alternative energy sources. MIT also has invaluable resources in mathematics and computer science as well as a culture which supports rigorous work. Studying at MIT would allow me to make the biggest contribution to environmental sustainability.

Ventana Systems

I looked up Ventana Systems, which is a company founded by Tom Fiddaman and some other people. They're located in Harvard, MA, which is near Boxborough, and I think I'm going to contact them to see if I can do an internship or something there.

This Economic Analysis Collaborative project sounds really interesting.

MIT's Copenhagen delegation

from MIT News John Sterman led the MIT delegation.

On Dec. 11, John Sterman, the Jay W. Forrester Professor in Computer Science at the Sloan School of Management and delegation leader for the MIT group in Copenhagen, will speak about C-ROADS (Climate Rapid Overview and Decision Support), a computer simulation program that emerged from research at MIT. The simulation model can quickly calculate the climate impacts from mitigation proposals that are presented during the climate change talks.

Throughout the conference, Sterman and his team of modelers and researchers, including four MIT alums — Tom Fiddaman PhD ’97, Travis Franck SM ’05, PhD ’09, Andrew Jones SM ’97 and Beth Sawin PhD ’96 — are providing a “climate scoreboard” that uses the C-ROADS model to assess the likely change in global mean temperature resulting from all the emissions reductions proposals offered by the nations of the world. Sterman’s group is from Climate Interactive, a joint project of MIT, the non-profit Sustainability Institute and Ventana Systems Inc., a software and consulting firm founded by MIT alumni.

System Dynamics Reading List

MIT System Dynamics Group Literature Collection is a DVD with papers on system dynamics.

a powerful tool that will advance your knowledge of the important history of the field at MIT and help build a foundation for understanding future growth.

I would probably be able to get all the readings at the MIT libraries, though.

Sociotechnical Systems

Another field of study at MIT that is part of the Engineering Systems Division is Sociotechnical Systems.

The Kondratieff Cycle

article from the Donella Meadows archive has a more comprehensive explanation of the causes of the Kondratieff Cycle. According this this account, there is a cause, although it's systemic, and thus there should still be ways to avoid it. There just might not be much the government itself can do in terms of monetary policy.

In a market economy there is no signal to tell the steel industry, for instance, how much steel the world really demands on a long-term basis. There is only one way to find out -- produce more steel and see if it sells. But that takes a long time. Each company has to make a decision to expand, get financing, build a plant, start producing, implement a marketing strategy, and sort out the confusing short-term signals from strikes, trade breakdowns, business cycles, and all the other noise of the economy.

All companies are expanding together, and they are fighting for market share, so each has an incentive to out-expand the others. The result is significant overbuilding, industry-wide, economy-wide, world-wide. It takes decades for the economy to overbuild itself, then to get the message that it has done so, then to believe that message. It takes another decade or two to cut back factories and workforces to the level of production the economy really needs. And since no one knows what that level is, the cutback, like the building phase, goes too far. When that finally becomes obvious, the next upturn of the cycle begins.

The Kondratief cycle is caused by a great lumbering economy, which takes decades to change course, seeking by trial and error for an ever-changing equilibrium point. The government doesn't cause the cycle's downturn, though it usually gets the blame; it also doesn't create the upturn for which it likes to take credit. Even if the economy consisted of nothing but well-run companies making impeccably rational decisions, the cycle would exist. The presence of greedy companies making foolish decisions makes it worse, as does a government trying to spur investment at a time when investment has already gone too far.

Speculative booms at the beginning of the downturn seem to be inherent. There is no real expansion to put money into -- no need for more oil wells or electric plants or steel mills when existing ones are standing idle. So excess money stops going into building the economy and starts going into conspicuous consumption and wild speculation. The stock market loosens its tethers to the real economy and starts soaring, blown up by money with nowhere else to go.

Interview with Jay Forrester

I think Forrester is hilarious. Here's interview from 1992 with McKinsey.

Explaining the Downfall

Bernanke made some speeches recently about how the housing bubble was caused by bad regulation not because of low interest rates.

However, Forrester disagrees. I still have to find the original posting, though.

However, he also says that this recession along with the Great Depression was just part of the economic long wave, the Kondatrieff Wave. That might imply that there was no cause and that nothing could have been done to prevent it.

This excerpt is from his paper System Dynamics and the Lessons of 35 Years 1991

In a similar way at the national level, the System Dynamics National Model shows that puzzling and controversial economic behavior arises directly from known structure and managerial policies (Forrester, 1979). By building production sectors of the National Model using managerial policies derived from 20 years of corporate modeling, we find that most economic behavior arises from the private sector. Governmental taxation and monetary policies have less effect than usually assumed and lack the expected leverage for controlling economic behavior. The Great Depression of the 1930s has been blamed both on restrictive monetary policy and on protective tariffs, but we find that depressions arise at 45 to 60 year intervals as a result of the economic long wave, or Kondratieff cycle, which is driven primarily by major shifts in private-sector incentives for investing in capital plant, borrowing, and saving (Forrester, 1977; Sterman, 1986).

Debate about the economic long wave illustrates the situation depicted in Figure 3 (Kondratieff, 1984; Freeman, 1983; van Duijn, 1983). There is little acceptance by economists of the idea that structures could exist capable of producing a major economic fluctuation with some 50 years between peaks. Yet much of the theory for such a long economic wave already is established in the mainstream of economic thought.

In teaching macroeconomics, the classic multiplier-accelerator process is often used to explain short-term business cycles having 3 to 10 years between peaks. The multiplier (rising consumer income causing increased demand) and the accelerator (rising demand causing increased capital investment, wages, and consumer income) represent widely accepted and fundamentally correct assumptions about structure and policies belonging in the top category in Figure 3.

However, the belief that the multiplier and accelerator interact to cause short-term business cycles arises from an assumed dynamic solution to the equations describing the structure. The assumed dynamic solution belongs to the middle category in Figure 3 where beliefs are often incorrect.

While investigating cyclic economic behavior, several system dynamics investigators have shown that the multiplier and accelerator are not significant in creating short-term business cycles but are powerful contributors to generating D-4224-4 19
much longer cycles having several decades between peaks (Forrester, 1982,
(Nathan B.); Low, 1980; Mass, 1975).

Even though the economic long wave has been broadly rejected in economics, the accepted multiplier-accelerator relationships go far in explaining long-wave behavior. Here we see a common situation. Both sides in a debate can usually agree on underlying assumptions. But there is disagreement about the dynamic consequences. Building those accepted assumptions into a dynamic model begins to resolve differences arising from incorrect intuitive solutions to complex systems.

Forrester on Reagan Proposals

Evaluation of the Reagan Economic Proposals by Jay W. Forrester and Nathaniel J. Mass

July 23, 1981

Summary of a presentation made to Sponsors of the System Dynamics National Model on May 5, 1981

I found Nathaniel Mass's obituary. Apparently after being Associate Professor at MIT he just worked at a bunch of consulting companies.

Anyway, I wanted to write about a few notable points from the paper.

Forrester argues that American businesses are not doing as well globally or even domestically not because of government regulation or labor, but because of "managerial ineffectiveness" and "fundamental long-term economic changes." By managerial ineffectiveness, he is referring to the fact that inefficient practices are being passed on to the consumer as higher prices. "Prices could be raised to cover rising costs because the increasing money supply created a public ability to pay higher prices." I wonder how relevant this criticism is today. Regarding "long-term economic changes," Forrester cites his paper "Productivity as Affected by Long-Term Economic Changes," 1979.

He also says that contrary to popular belief, tight money supply has little effect on business cycles and real economic activity. "Business cycles can combine with an underlying steady inflaction caused by the creation of excess money to induce the Federal Reserve to tighten money just ahead of a recession that was already imminent." "Our computer simulations of economic behavior indicate that the mild recessions following World War II were not a result of government policy but instead were a consequence of the capital-construction boom at that time for rebuilding the capital plant that had become obsolete during the depression of the 1930's and World War II." I wonder if there is more analysis somewhere about why the Great Depression happened.

Forrester says that "the Johnson administration has correctly come to be blamed for starting the trend toward high inflation." Although, he notes that "the process of inflationary deficits coupled with money creation to cover the deficit" has been perpetuated by every administration since. Apparently, the ave annual deficit during the Johnson administration was $8.6 billion. During Nixon's first time, it was $16, during his second term, it was $43.5, and during the Carter administration, it was $47.3 billion. We all know what happened from there.

Forrester approves of reducing government spending, a 'supply-side' policy, although he doesn't think the Reagan administration is putting enough emphasis on it. Indeed, while Reagan reduced spending on social programs, I believe that he increased defense spending so much that the deficit ballooned. "As people are released from government employment and from support through transfer payments, more human resources become available for private-sector production. Only through such transfer to making goods, growing food, and building housing can the standard of living of the country be raised."

The concept of the velocity of money is also notable. I'm not too clear on what it is, but it seems like the idea of increasing leverage of banking institutions. "As velocity increases and becomes more volatile, the Federal Reserve loses more and more of its control over the effectiveness of money. Because of the multiple forces now converging to increase velocity, a direct legal control of velocity may soon be needed. Such a control would take the form of setting a minimum permissible bank balance in terms of a specified number of days worth of average transactions."

I wonder if Forrester and System Dynamics began to fall out of favor with their assessment of the Reagan policies since Reagan became immensely popular. However, their prediction that Reagan's policies would increase the deficit certainly happened, although I'm not sure if their prediction about rising inflation happened. Perhaps that prediction just materialized with the crash in 2008.

Commandeering Words

Today I found out that a "wicked problem" is a technical term in the field of social planning that refers to

a problem that is difficult or impossible to solve because of incomplete, contradictory, and changing requirements that are often difficult to recognize. Moreover, because of complex interdependencies, the effort to solve one aspect of a wicked problem may reveal or create other problems.

"super wicked problems" are wicked problems where

Time is running out.
There is no central authority.
Those seeking to solve the problem are also causing it.

the cited example is global climate change. hahaha

Evaluation of the Reagan Economic Proposals

A presentation made by Jay Forrester and Nathaniel Mass in 1981.

conclusions are that

1. The best way to combat inflation in the long run is to reduce government spending. That is, "reducing the share of GNP demanded by government so that a larger share can be retained in the private sector as incentive for greater output and an improved standard of living.
2. Cutting taxes while there is a deficit "will strongly increase the risk of money creation and inflation." "The effect on wages and prices will be just enough to cancel the apparent direct supply-side incentives offered by the tax reduction."

Pretty interesting combination of liberal and conservative economic policies. I wonder what it means for climate change policy, though. Does this mean it's bad if the government funds programs for technology research and development? If so, then what can the government do instead?

New Green Economy Conference

I'm seriously taking some days off and attending this conference hosted by the National Council for Science and the Environment, the New Green Economy Conference in D.C.

They are asking exactly the questions I want to answer.