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System Dynamics and Its Contribution to Economics and Economic Modeling

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Meyers: Encyclopedia of Complexity and Systems Science — Entry 568 — 2008/10/2 — 16:27 — page 1 — le-tex

System Dynamics and Its Contribution to Economics and Economic Modeling 1

tive action. If this corrective action is not significantly 44

System Dynamics delayed, the system will smoothly adjust to its goal. If 45
and Its Contribution to Economics the corrective action is delayed, however, the system 46

and Economic Modeling can overshoot or undershoot its goal and the system 47

can oscillate. 48
1 MICHAEL J. RADZICKI
Full information maximum likelihood with opti- 49
2 Worcester Polytechnic Institute, Worcester, USA
mal filtering FIMLOF is a sophisticated technique for es- 50

timating the parameters of a system dynamics model, 51

3 Article Outline while simultaneously fitting its output to numerical 52

4 Glossary data. Its intellectual origins can be traced to control 53

5 Definition of the Subject engineering and the work of Fred Schwepe. David Pe- 54

6 Introduction terson pioneered a method for adapting FIMLOF for 55

7 Types of Dynamic Simulation use in system dynamics modeling. 56

8 Translating Existing Economic Models

9 into a System Dynamics Format
10 Improving Existing Economic Models Definition of the Subject 57

11 with System Dynamics System dynamics is a computer modeling methodology 58

12 Creating Economic Dynamics Models from Scratch that has its intellectual origins in control engineering, 59
13 Model Validity management science, and digital computing. It was orig- 60
14 Controversies inally created as a tool to help managers better understand 61
15 Future Directions and control corporate systems. Today it is applied to prob- 62

16 Bibliography lems in a wide variety of academic disciplines, including 63

economics. Of note is that system dynamics models of- 64

17 Glossary ten generate behavior that is both counterintuitive and at 65

odds with traditional economic theory. Historically, this 66

18 Stock Stocks, which are sometimes referred to as “levels”
has caused many system dynamics models to be evaluated 67
19 or “states”, accumulate (i. e., sum up) the information
critically, especially by some economists. However, today 68
20 or material that flows into and out of them. Stocks
economists from several schools of economic thought are 69
21 are thus responsible for decoupling flows, creating de-
beginning to use system dynamics, as they have found 70
22 lays, preserving system memory, and altering the time

f
it useful for incorporating their nontraditional ideas into 71
23 shape of flows.
formal models. 72

o
24 Flow Flows of information or material enter and exit
25 a system’s stocks and, in so doing, create a system’s

ro
26 dynamics. Stated differently, the net flow into or out Introduction 73

27 of a stock is the stock’s rate of change. When hu- System dynamics is a computer simulation modeling 74

28 man decision making is represented in a system dy- methodology that is used to analyze complex nonlinear 75

29

30
namics model, it appears in the system’s flow equa-
tions. Mathematically, a system’s flow equations are
dynamic feedback systems for the purposes of generat-
ing insight and designing policies that will improve sys-
P 76

77

d
31 ordinary differential equations and their format deter- tem performance. It was originally created in 1957 by Jay 78

32 mines whether or not a system is linear or nonlinear. W. Forrester of the Massachusetts Institute of Technol- 79

33

34
Feedback Feedback is the transmission and return of in-
formation about the amount of information or mate-
ogy as a methodology for building computer simulation

t
models of problematic behavior within corporations. The

0 e 2 80

81

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rial that has accumulated in a system’s stocks. When models were used to design and test policies aimed at al-
-
35 82

36 the return of this information reinforces a system’s be- tering a corporation’s structure so that its behavior would 83

37

38

39
havior, the loop is said to be positive. Positive loops
are responsible for the exponential growth of a sys-
tem over time. Negative feedback loops represent goal
seeking behavior in complex systems. When a nega-
e
improve and become more robust. Today, system dynam-

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ics is applied to a large variety of problems in a multitude
of academic disciplines, including economics.
System dynamics models are created by identifying
84

85

86

o
40 87

41 tive loop detects a gap between the amount of infor-

2
and linking the relevant pieces of a system’s structure 88

c
42 mation or material in a system’s stock and the desired and simulating the behavior generated by that structure. 89

43 amount of information or material, it initiates correc- Through an iterative process of structure identification, 90

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2 System Dynamics and Its Contribution to Economics and Economic Modeling

91 mapping, and simulation a model emerges that can ex- significant time lags in the corrective actions of a neg- 142

92 plain (mimic) a system’s problematic behavior and serve ative loop, it can overshoot or undershoot its goal and 143

93 as a vehicle for policy design and testing. cause the system to oscillate. Examples of negative feed- 144

94 From a system dynamics perspective a system’s struc- back processes in economic systems include equilibrating 145

95 ture consists of stocks, flows, feedback loops, and limit- mechanisms (“auto-pilots”) such as simple supply and de- 146

96 ing factors. Stocks can be thought of as bathtubs that ac- mand relationships, stock adjustment models for inven- 147

97 cumulate/de-cumulate a system’s flows over time. Flows tory control, any purposeful behavior, and many of the re- 148

98 can be thought of as pipe and faucet assemblies that fill or lationships found in macroeconomic business cycle the- 149

99 drain the stocks. Mathematically, the process of flows ac- ory. Meadows [27], Mass [26], Low [23], Forrester [12], 150

100 cumulating/de-cumulating in stocks is called integration. and Sterman [54] provide examples of system dynamics 151

101 The integration process creates all dynamic behavior in models that generate cyclical behavior at the macro-eco- 152

102 the world be it in a physical system, a biological system, nomic and micro-economic levels. 153

103 or a socioeconomic system. Examples of stocks and flows From a system dynamics point of view, positive and 154

104 in economic systems include a stock of inventory and its negative feedback loops fight for control of a system’s be- 155

105 inflow of production and its outflow of sales, a stock of the havior. The loops that are dominant at any given time de- 156

106 book value of a firm’s capital and its inflow of investment termine a system’s time path and, if the system is nonlin- 157

107 spending and its outflow of depreciation, and a stock of ear, the dominance of the loops can change over time as 158

108 employed labor and its inflow of hiring and its outflow of the system’s stocks fill and drain. From this perspective, 159

109 labor separations. the dynamic behavior of any economy – that is, the in- 160

110 Feedback is the transmission and return of informa- teractions between the trend and the cycle in an economy 161

111 tion about the amount of information or material that has over time – can be explained as a fight for dominance be- 162

112 accumulated in a system’s stocks. Information travels from tween the economy’s most significant positive and nega- 163

113 a stock back to its flow(s) either directly or indirectly, and tive feedback loops. 164

114 this movement of information causes the system’s faucets In system dynamics modeling, stocks are usually con- 165

115 to open more, close a bit, close all the way, or stay in the ceptualized as having limits. That is, stocks are usually seen 166

116 same place. Every feedback loop has to contain at least as being unable to exceed or fall below certain maximum 167

117 one stock so that a simultaneous equation situation can and minimum levels. Indeed, an economic model that can 168

118 be avoided and a model’s behavior can be revealed recur- generate, say, either an infinite and/or a negative work- 169

119 sively. Loops with a single stock are termed minor, while force would be seen as severely flawed by a system dy- 170

120 loops containing more than one stock are termed major. namicist. As such, when building a model system dynam- 171

121

122

123
Two types of feedback loops exist in system dynam-
ics modeling: positive loops and negative loops. Generally
speaking, positive loops generate self-reinforcing behavior
icists search for factors that may limit the amount of ma-
terial or information that the model’s stocks can accumu-
late. Actual socioeconomic systems possess many limiting
172

173

174

o f
124

125

126
and are responsible for the growth or decline of a system.
Any relationship that can be termed a virtuous or vicious
circle is thus a positive feedback loop. Examples of positive
gets a machine can produce per unit of time), cognitive

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factors including physical limits (e. g., the number of wid-

limits (e. g., the amount of information an economic agent

175

176

177

127

128
loops in economic systems include path dependent pro-
cesses, increasing returns, speculative bubbles, learning-
P
can remember and act upon), and financial limits (e. g., the
maximum balance allowed on a credit card). When limit-
178

179

d
129 by-doing, and many of the relationships found in macroe- ing factors are included in a system dynamics model, the 180

130 conomic growth theory. Forrester [12], Radzicki and Ster- system’s approach to these factors must be described. Gen- 181

131

132
man [46], Moxnes [32], Sterman (Chap. 10 in [55]), Radz-
icki [44], Ryzhenkov [49], and Weber [58] describe system

t e 2
erally speaking, this is accomplished with nonlinear re-
lationships. Figure 1 presents a simple system dynamics

0
182

183

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dynamics models of economic systems that possess domi- model that contains examples of all of the components of
-
133 184

134 nant positive feedback processes. system structure described above. 185

135

136

137
Negative feedback loops generate goal-seeking behav-
ior and are responsible for both stabilizing systems and
causing them to oscillate. When a negative loop detects
a gap between a stock and its goal it initiates corrective
e
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Types of Dynamic Simulation-
From a system dynamics point of view, solving a dynamic
186

o
138 187

139 action aimed at closing the gap. When this is accom-

2
model – any dynamic model – means determining how 188

c
140 plished without a significant time delay, a system will ad- much material or information has accumulated in each of 189

141 just smoothly to its goal. On the other hand, if there are a system’s stocks at every point in time. This can be ac- 190

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Meyers: Encyclopedia of Complexity and Systems Science — Entry 568 — 2008/10/2 — 16:27 — page 3 — le-tex

System Dynamics and Its Contribution to Economics and Economic Modeling 3

System Dynamics and Its Contribution to Economics and Economic Modeling, Figure 1
Simple system dynamics model containing examples of all components of system structure

191 complished in one of two ways – analytically or via sim- cumulating in tanks. Barr [2] provides a vivid description 210

o f
o
192 ulation. Linear dynamic models can be solved either way. of the history and restoration of the Phillips Machine. 211

r
193 Nonlinear models, except for a few special cases, can only On a digital computer, the continuous flow of eco- 212

194 be solved via simulation. nomic variables in and out of stocks over time is approxi- 213

P
195 Simulated solutions to dynamic systems can be at- mated by specifying the initial amount of material or infor- 214

196 tained from either a continuous (analog) computer or mation in a system’s stocks, breaking simulated time into 215

a discrete (digital) computer. Understanding the basic small increments, inching simulated time forward by one

d
197 216

198 ideas behind the two approaches is necessary for under- of these small increments, calculating the amount of mate- 217

e 2
199 standing how economic modeling is undertaken with sys- rial or information that flowed into and out of the system’s 218

t
200 tem dynamics. stocks during this small interval, and then repeating. The 219

-0
In the real world, of course, time unfolds continuously. solution to the system will always be approximate because

c 10
201 220

202 Yet, devising a way to mimic this process on a machine is the increment of time cannot be made infinitesimally small 221

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203 a bit tricky. On an analog computer, the continuous flow of and thus simulated time cannot be made perfectly contin- 222

8-
204 economic variables in and out of stocks over time is mim- uous. In fact, on a digital computer a trade-off exists be- 223

205 icked by the continuous flow of some physical substance tween round-off error and integration error. If the incre- 224

206 such as electricity or water. A wonderful example of the ment of time is made too large, the approximate solution 225

207

208

209
later case is the Phillips Machine, which simulates an or-
thodox Keynesian economy (essentially the IS-LM model)
with flows of colored water moving through pipes and ac- o 2
can be poor due to integration error. If the increment of

c
time is made too small, the approximate solution can be
ruined due to round-off error.
226

227

228

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4 System Dynamics and Its Contribution to Economics and Economic Modeling

229 In system dynamics modeling the “true” behavior of so that it more closely adheres to the principles of system 278

230 the underlying system is conceptualized to unfold over dynamics modeling. This approach attempts to blend the 279

231 continuous time. As such, mathematically, a system dy- advantages of the first two approaches, although it is more 280

232 namics model is an ordinary differential equation model. closely related to the former. 281

233 To approximate the solution to a continuous time ordi- Generally speaking, existing economic models that 282

234 nary differential equation model on a digital (discrete) can be translated into a system dynamics format can be 283

235 computer, however, difference equations are used. Unlike divided into four categories: written, static (mathemati- 284

236 traditional difference equation modeling in economics, in cal), difference equation, and ordinary differential equa- 285

237 which the increment of time is chosen to match economic tion. Existing economic models that have been created 286

238 data (typically a quarter or a year), the increment of time in either a difference equation or an ordinary differential 287

239 in system dynamics modeling is chosen to yield a solution equation format can be translated into system dynamics 288

240 that is accurate enough for the problem at hand, yet avoids in a fairly straight-forward manner. For example, Fig. 2 289

241 the problems associated with significant round-off and in- presents Sir John Hicks’ [21] Multiplier-Accelerator dif- 290

242 tegration error. ference equation model in a system dynamics format and 291

243 The use of difference equations to approximate the un- Fig. 3 presents the Robert Solow’s [52] ordinary differen- 292

244 derlying differential equations represented by a system dy- tial equation growth model in a system dynamics format. 293

245 namics model provides another interesting option when it Translating existing static and written economic mod- 294

246 comes to economic modeling. Since many well known dy- els and theories into a system dynamics format is a more 295

247 namic economic models have been created with difference formidable task. Written models and theories are often dy- 296

248 equations, they can be recast in a system dynamics format namic, yet are described without mathematics. Static mod- 297

249 by using the difference equations in the system dynamics els and theories are often presented with mathematics, but 298

250 software literally as difference equations, and not as a tool lack equations that describe the dynamics of any adjust- 299

251 to approximate the underlying continuous time system. ment processes they may undergo. As such, system dy- 300

252 Although doing this deviates from the original ideas em- namicists must devise equations that capture the dynam- 301

253 bodied in the system dynamics paradigm, it is occasion- ics being described by the written word or that reveal the 302

254 ally done when a modeler feels that analyzing a difference adjustment processes that take place when a static system 303

255 equation model in a system dynamics format will yield moves from one equilibrium point to another. 304

256 some additional insight. An interesting example of a system dynamics model 305

that was created from a written economic model is Barry 306

Richmond’s [48] model of Adam Smith’s Wealth of Na- 307

f
257 Translating Existing Economic Models
tions. This model was created principally from Robert 308
258 into a System Dynamics Format

o
Heilbronner’s [20] written description of Smith’s eco- 309

259 There are three principle ways that system dynamics is nomic system. A classic example of a static model that has 310

260

261

262
used for economic modeling. The first involves translat-
ing an existing economic model into a system dynamics
format, while the second involves creating an economic
been translated into a system dynamics format is a simple
two sector Keynesian cross model, as is shown in Fig. 4.

r o 311

312

263

264
model from scratch by following the rules and guidelines
of the system dynamics paradigm. Forrester [7], Richard-
Improving Existing Economic Models
with System Dynamics P 313

314

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265 son and Pugh [47], Radzicki [42], and Sterman [55] pro-
266 vide extensive details about these rules and guidelines. The The simple two sector Keynesian cross model presented 315

267

268
former approach is valuable because it enables well-known
economic models to be represented in a common format,
in Fig. 4 is an example of a well known economic model

t
that can be improved after it has been translated into

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317

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which makes comparing and contrasting their assump- a system dynamics format. More specifically, in this ex-
-
269 318

270 tions, concepts, structures, behaviors, etc., fairly easy. The ample the flow of investment spending in the model 319

271

272

273
latter approach is valuable because it usually yields mod-
els that are more realistic and that produce results that are
“counterintuitive” [11] and thus thought-provoking.
The third way that system dynamics can be used for
e
does not accumulate anywhere. This violates good sys-

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tem dynamics modeling practice and can be fixed. Fig-
ure 5 presents the improved version of the Keynesian
Cross model, which now more closely adheres to the sys-
320

321

322

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274 323

275 economic modeling is a “hybrid” approach in which a well

2
tem dynamics paradigm. Other well known examples of 324

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276 known economic model is translated into a system dynam- classic economics models that have been improved after 325

277 ics format, critiqued, and then improved by modifying it they have been translated into a system dynamics format 326

TS2 Please check reference [13].

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System Dynamics and Its Contribution to Economics and Economic Modeling 5

System Dynamics and Its Contribution to Economics and Economic Modeling, Figure 2
System dynamics representation of John Hicks’ multiplier-accelerator difference equation model

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System Dynamics and Its Contribution to Economics and Economic Modeling, Figure 3
System dynamics representation of Robert Solow’s ordinary differential equation growth model
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and made to conform more closely with good system dy- Creating Economic Dynamics Models from Scratch P
d
327 340

328 namics modeling practice include the cobweb model [27],

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329 Sir John Hicks’ multiplier-accelerator model [23], the IS- Although translating well known economic models into 341

330

331

332
LM/AD-AS model [13,59] TS2 , Dale Jorgenson’s invest-
ment model [51], William Nordhaus’ [34] DICE climate
change model [4,5], and basic micro economic supply t
a system dynamics format can arguably make them easier

c 10 0
to understand and use, system dynamicists believe that the
-
“proper” way to model an economic system that is experi-
342

343

344

333

334

335
and demand mechanisms [24]. Low’s improvement of
Hicks’ model is particularly interesting because it results
in a model that closely resembles Bill Phillips’ [40] multi-
plier-accelerator model. Senge and Fiddaman’s contribu-
e
encing a problem is to do so from scratch while following

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good system dynamics modeling practice. Unlike ortho-
dox economists who generally follow a deductive, logical
positivist approach to modeling, system dynamicists fol-
345

346

347

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336 348

337 tions are also very interesting because they demonstrate

2
low an inductive pattern modeling or case study process. 349

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338 how the original economic models are special cases of their More specifically, a system dynamicist approaches an eco- 350

339 more general system dynamics formulations. nomic problem like a detective who is iteratively piecing 351

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6 System Dynamics and Its Contribution to Economics and Economic Modeling

System Dynamics and Its Contribution to Economics and Economic Modeling, Figure 4
Simple two sector Keynesian cross model in a system dynamics format

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System Dynamics and Its Contribution to Economics and Economic Modeling, Figure 5
Improved simple two sector Keynesian cross model
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352

353
together an explanation at a crime scene. All types of data
that are deemed relevant to the problem are considered in-
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pologies (termed “generic structures” in system dynamics)
and principles of systems. Real typologies are commonali-
357

358

354

355

356
cluding numerical, written, and mental information. The
system dynamicist is guided in the pattern modeling pro-
cess by the perceived facts of the case, as well as by real ty- o 2
ties that have been found to exist in different pattern mod-

c
els and principles of systems are commonalities that have
been found to exist in different real typologies. Paich [36]
359

360

361

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System Dynamics and Its Contribution to Economics and Economic Modeling 7

362 discusses generic structures at length and Forrester [8] lays Senge [16] and Barlas [1] have developed a comprehensive 411

363 out a set of principles of systems. series of tests that can be applied to a model’s structure 412

364 Examples of a real typologies in economics include and behavior and they argue that the more tests a model 413

365 Forrester’s [9] Urban Dynamics model, which can repro- can pass, the more confidence a model builder or user 414

366 duce the behavior of many different cities when properly should place in its results. Even more fundamentally, how- 415

367 parametrized for those cities, and Homer’s [22] model of ever, Forrester [13] has argued that the real value gener- 416

368 the diffusion of new medical technologies into the mar- ated through the use of system dynamics comes, not from 417

369 ket place, which can explain the behavior of a wide variety any particular model, but from the modeling process itself. 418

370 of medical technologies when properly parametrized for In other words, it is through the iterative process of model 419

371 those technologies. Examples of fundamental principles conceptualization, creation, simulation, and revision that 420

372 of systems include the principle of accumulation, which true learning and insight are generated, and not through 421

373 states that the dynamic behavior of any system is due to interaction with the resulting model. 422

374 flows accumulating in stocks, and the notion of stocks and Another issue that lies under the umbrella of model va- 423

375 flows being components of feedback loops. The parallels lidity involves fitting models to time series data so that pa- 424

376 for these principles in economics can be found in modern rameters can be estimated and confidence in model results 425

377 Post Keynesian economics, in which modelers try to build can be raised. In orthodox economics, of course, econo- 426

378 “stock-flow consistent models,” and in institutional eco- metric modeling is almost universally employed when do- 427

379 nomics, in which the principle of “circular and cumulative ing empirical research. Orthodox economic theory dic- 428

380 causation” is deemed to be a fundamental cause of eco- tates the structure of the econometric model and powerful 429

381 nomic dynamics. Radzicki [41,43,45] lays out the case for statistical techniques are used to tease out parameter val- 430

382 the parallels that exist between methodological concepts in ues from numerical data. 431

383 system dynamics and methodological concepts in various System dynamicists, on the other hand, have tradition- 432

384 schools of economic thought. ally argued that it is not necessary to tightly fit models to 433

385 The economic models that have been historically cre- time series data for the purposes of parameter estimation 434

386 ated from scratch by following the system dynamics and confidence building. This is because: 435

387 paradigm have tended to be fairly large in scale. For-

1. the battery of tests that are used to build confidence in 436
388 rester’s [12] national economic model is a classic exam-
system dynamics models go well beyond basic econo- 437
389 ple, as are the macroeconomic models created by Ster-
metric analysis; 438
390 man [53], the Millennium Institute [31], Radzicki [45],
2. the particular (measured) time path that an actual eco- 439
391 Wheat [59], and Yamaguchi [60]. Dangerfield [3] has de-

f
nomic system happened to take is merely one of an in- 440
392 veloped a model of Sarawak (E. Malaysia) to analyze and
finite number of paths that it could have taken and is 441

o
393 plan for economic transition from a production economy
a result of the particular stream of random shocks that 442
394 to a knowledge-based one. With the exception of Radz-
happened to be historically processed by its structure.

o
443
395 icki [45], whose model is based on ideas from Post Key-
As such, it is more important for a model to mimic the

r
444
396 nesian and institutional economics, these models, by and
basic character of the data, rather than fit it point-by- 445
397 large, embody orthodox economic relationships.
point [14];

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446

3. utilizing the pattern modeling/case study approach en- 447

398 Model Validity ables the modeler to obtain parameter values via ob- 448

399

400
When a system dynamics model of an economic system
that is experiencing a problem is built from scratch, the
d
servation below the level of aggregation in the model,
rather than via statistical analysis [18];

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449

450

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4. the result of a system dynamics modeling intervention 451
401 modeling process is typically quite different from that
is typically a set of policies that improve system per-
0
452

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which is undertaken in traditional economics. As such, the
-
402
formance and increase system robustness. Such poli- 453
403 question is raised as to whether or not an original system
cies are usually feedback-based rules (i. e., changes to

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454
404 dynamics model is in any sense “valid”.

8-
institutional structure) that do not require the accurate 455
405 System dynamicists follow a “pattern modeling” ap-
point prediction of system variables. 456
406 proach [41] and do not believe that models should be
judged in a binary fashion as either “valid” or “invalid”. Although the arguments against the need to fit models to

o
407 457

408 Rather, they argue that confidence in models can be gen- time series data are well known in system dynamics, many 458

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409 erated along multiple dimensions. More specifically, sys- system dynamicists feel that it is still a worthwhile activ- 459

410 tem dynamicists such as Peterson [38], Forrester and ity because it adds credibility to a modeling study. More- 460

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8 System Dynamics and Its Contribution to Economics and Economic Modeling

461 over, in modern times, advances in software technology Another interesting and timely example of the sort 510

462 have made this process relatively easy and inexpensive. Al- of controversy surrounding system dynamics model- 511

463 though several techniques for estimating the parameters ing in economics is provided by Sterman and Richard- 512

464 of a system dynamics model from numerical data have son [56]. In this paper they present a technique for testing 513

465 been devised, perhaps the most interesting is David Peter- whether Hubbert’s lifecycle method or the geologic anal- 514

466 son’s [38,39] Full Information Maximum Likelihood with ogy method yields superior estimates of the ultimately re- 515

467 Optimal Filtering (FIMLOF). Figure 5 presents a run from coverable amount of petroleum resources. This study was 516

468 the Harrod growth model, to which an adaptive expec- motivated by a disagreement with a traditionally trained 517

469 tations structure has been added, after it has been fit via economist over the proper way to conceptualize this is- 518

470 FIMLOF to real GDP and labor supply data for the United sue. Sterman and Richardson devised a clever synthetic 519

471 States economy for the years 1929–2004. The fit is ex- data experiment in which a system dynamics model serves 520

472 cellent and the estimated parameter values are consistent as the “real world” with a known ultimately recoverable 521

473 with those from more traditional econometric studies. See amount of oil. Hubbert’s method and the geologic anal- 522

474 Radzicki [44] for a detailed description of the model and ogy method are then programmed into the model so they 523

475 its parameter estimates. can “watch” the data being generated by the “real world” 524

and provide dynamic estimates of the “known” ultimately 525

recoverable stock of oil. The results showed that Hub- 526

476 Controversies
bert’s method was quite accurate, although it had a ten- 527

477 Since system dynamics modeling is undertaken in a way dency to somewhat underestimate the ultimately recov- 528

478 that is significantly different from traditional economic erable amount of oil, while the geologic analogy method 529

479 modeling, it should come as no surprise that many tended to overshoot the resource base quite substantially. 530

480 economists have been extremely critical of some system

481 dynamics models of economic systems. For example, For-
Future Directions 531
482 rester’s [9] Urban Dynamics and [10] World Dynamics
483 models have come under severe attack by economists, as Historically, system dynamicists who have engaged in eco- 532

484 has (to a lesser degree) his national economic model. On nomic modeling have almost never been trained as pro- 533

485 the other hand, the first paper in the field of system dy- fessional economists. As such, they have had the advan- 534

486 namics is Forrester [6], which is essentially a critique of tage of being able to think about economic problems dif- 535

487 traditional economic modeling. ferently from those who have been trained along tradi- 536

488 Greenberger et al. [19] present a nice overview of tional lines, but have also suffered the cost of being seen 537

489

490

491
the controversies surrounding the Urban Dynamics and
World Dynamics models. Forrester and his colleagues’
replies to criticisms of the Urban Dynamics model are con-
as “amateurs” or “boy economists” [41] by members of
the economics profession. The good news is that there
are currently several schools of economic thought, popu-
538

539

540

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492 tained in Mass [25] and Schroeder et al. [50]. lated by professional economists, in which system dynam- 541

493 One of the harshest critics of the World Dynam- ics fits quite harmoniously. These include Post Keynesian 542

494 ics (WORLD2) model has been Nordhaus [33]. Nord- economics, institutional economics, ecological economics, 543

495

496
haus [35] has also very critical of the well known follow-
up study to World Dynamics known as The Limits to
and behavioral economics. Historically, the economists in
these schools have rejected many of the tenets of tradi-
P 544

545

d
497 Growth [28]. Meadows et al. [29,30] contain updates to tional economics, including most of its formal modeling 546

498 the original Limits to Growth (WORLD3) model, as well methods, yet have failed to embrace alternative modeling 547

499

500
as replies to the world modeling critics.
Forrester [12] presents a nice overview of his national
techniques because they were all seen as inadequate for

t
representing the concepts they felt were important. How-

0 e 2 548

549

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economic model, and the critiques by Stolwijk [57] and ever in the modern era, with computers having become
-
501 550

502 Zellner [61] are typical of the attitude of the professional ubiquitous and simulation having become in some sense 551

503

504

505
economists toward macroeconomic modeling that is un-
dertaken by following the traditional system dynamics
paradigm. The criticism of Forrester’s national economic
model by the economics profession has probably been
e
routine, system dynamics is increasingly being accepted as

rr 00 8 -
an appropriate tool for use in these schools of economic
thought. The future of economics and system dynamics
will most probably be defined by the economists who work
552

553

554

o
506 555

507 less severe, relative to the criticisms of the Urban Dynam-

2
within these schools of thought, as well as by their stu- 556

c
508 ics and world models, because most of its details are still dents. The diffusion of system dynamics models of eco- 557

509 largely unpublished at the time of this writing. nomic systems through their translation into user-friendly 558

TS3 Please confirm reference [24].

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System Dynamics and Its Contribution to Economics and Economic Modeling 9

System Dynamics and Its Contribution to Economics and Economic Modeling, Figure 6
Fit of the Harrod growth model to US macroeconomic data for the years 1929–2004

559 interactive “learning environments” that are available over Twenty-First Annual Conference of the System Dynamics Soci- 597

560 the world wide web will most likely also be of great impor- ety. Available from http://www.systemdynamics.org/ 598

561 tance (see [24,59]). TS3 15. Forrester J, Low G, Mass N (1974) The debate on world dynam- 599
ics: A response to Nordhaus. Policy Sci 5:169–190 600

16. Forrester J, Senge P (1980) Tests for building confidence in sys- 601

562 Bibliography tem dynamics models. In: Legasto Jr AA, Forrester JW, Lyneis 602
JM (eds) TIMS Studies in the Management Sciences: System 603

563 Primary Literature Dynamics, vol 14. North Holland Publishing Company, Amster- 604

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565 ics Type of Simulation Models. Eur J Operat Res 42(1):59–87 17. Forrester N (1982) A dynamic synthesis of basic macroeco- 606

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TS4
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