Journal of the Operational Research Society (1997) 48, 1037±1043 #1997 Operational Research Society Ltd.
d. All rights reserved. 0160-5682/97 $12.00
Book Selection
Edited by JM Wilson
JW Forrester: Industrial Dynamics
RA Jarrow, V. Maksimovic and WT Ziemba (Eds): Handbooks in Operations Research and Management
Science Volume 9 Finance
J Jahn: Introduction to the Theory of Nonlinear Optimization (Second Revised Edition)
From the Book Reviews Editor
The reissue by Productivity Press, Portland, Oregon of
`Industrial Dynamics' by JW Forrester, together with the
reissue of other work by Forrester and his colleagues has
been seen as a key event in Operational Research and
System Dynamics as it provides an opportunity to reassess
the impact of the work of Forrester. It is now nearly 40 years
since the original modelling work was carried out and it is
interesting to see how it has withstood the test of time. In the
ensuing period we have seen a great revolution in modelling
caused by factors such as the availability of extensive, cheap
computing power. The emphasis was necessarily different
when these books ®rst appeared.
The Journal has invited Dr David Lane, London School
of Economics, to contribute a series of reviews of the
reissued books. The series commences below with an
extensive review and reappraisal of the book `Industrial
Dynamics' and the ®eld that developed from it. In subse-
quent issues of the Journal the associated books will be
reviewed.
Loughborough University JM Wilson
Invited Review and Reappraisal
Industrial Dynamics
JW Forrester
Productivity Press, Portland, Oregon, 1994. xv ‡ 464 pp.
$40.00. ISBN 1 800 394 6868
This book lays out the perspective and theory of the System
Dynamics ®eld. In offering this `construct paradigm', its
author's aim was nothing less than a revolution in manage-
ment science. Forrester proposes a whole new way to
understand and model management problems. Social
systems should be modelled as ¯ow rates and accumula-
tions linked by information feedback loops involving
delays and non-linear relationships. Computer simulation
1037
1042
1042
is then the means of inferring the time evolutionary
dynamics endogeneously created by such system structures.
The purpose is to learn about their modes of behaviour and
to design policies which improve performance. Early chap-
ters set out the approach, the middle ones treat three
examples in detail and the closing chapters deal with
consequences for the future of management science prac-
tice and teaching. There are numerous tables and ®gures
and also an index.
The book is presented in an Introduction followed by 21
chaptersÐorganised into four partsÐand 15 appendices. In
his `Introduction', Professor Forrester offers a perspective
on the state of management science in 1961. Arguing that
the practice of management exists only as a loose assembly
of empirical observations, he then proposes that feedback
concepts can provide a more sound theoretical foundation
and an integrating framework for diverse observations on
the behaviour of social systems. Part I, `The Managerial
Viewpoint', then introduces the ideas of Industrial
Dynamics, applies them to a problem of inventory manage-
ment and then explores how the use of such a model can
enhance management education. Parts II and III are the
meat of this book. In Part IIÐ`Dynamic Models of Indus-
trial and Economic ActivityÐ11 chapters describe in
technical detail the type of models that system dynamics
encourages users to build. Forrester compared and contrasts
such models with other modelling approaches. He describes
the principles to be used in formulating models of contin-
uous processes whilst employing the notion of information
feedback. A detailed chapter on the formulation of equa-
tions for the DYNAMO package is followed by an account
of the symbols used in mapping out models. The repre-
sentation of delays and managerial policies is also treated,
as is the importance of aggregating variables at the correct
level and of treating exogeneous variables appropriately.
Part II closes with a chapter on the validation of system
dynamics models.
In Part IIIÐ`Examples of Dynamic System ModelsÐ
two System Dynamics models are treated in detail, both
1038 Journal of the Operational Research Society Vol. 48, No. 10
being derived from case studies. The ®rst extends the
earlier inventory model by considering different market
effects and the consequences of advertising. The formula-
tion of the model, its parameterisation, the range of
experiments performed and the value gained in under-
standing the endogeneous mechanisms causing oscillations
are all carefully described. The second model takes a broad
view of a company, representing production, stocks, sales,
distribution, customers and marketing in order to probe the
reasons for oscillations in employment levels. Again, the
model is examined in detail. The core of Forrester's book
closes with Part IV on the `Future of Industrial Dynamics'.
Here he tries to indicate how the ®eld should develop and
the bene®ts to be obtained. He brie¯y describes further
applications of the approach in order to emphasise its
breadth. He returns to the integrative aspirations of the
approach, describing how case studies can be brought to
life by the use of models which then act as experimental
laboratories for research and the conduct of scienti®c
experiments in support of management education. Part IV
closes with some suggestions on how System Dynamics
can be introduced and nurtured within corporations.
However, the value of the book is incomplete without the
extensive appendices; nearly 100 pages of them. These tend
to address various speci®c and technical matters: programs
and outputs of previously described models, the determina-
tion of the appropriate time step for a model and the
application of the control theoretical concepts of phase
and gain to System Dynamics models. However, Appendix
O, on `Beginner's Dif®culties' gives a broad and helpful
list of encouragements and tips.
The book was originally published in 1961 by MIT
Press. However, in a manner reminiscent of John Wiley's
re-release of Stafford Beer's books, Productivity Press has
acquired many books in the ®eld of System Dynamics with
a view to making them more easily available. In future
numbers of JORS, I will be reviewing some of this
impressive list of works but I must preface my speci®c
comments on Forrester's book by welcoming Produc-
tivity's initiative. The improved availability of these
works is a great help to thoseÐsuch as IÐwho teach
System Dynamics, and Productivity are to be congratulated
for their initiative in re-issuing this and other works.
Let me return now to Forrester's book and offer some
comment. This is the founding work in the System
Dynamics ®eld. The creation of the ®eld is variously
dated; some use the ®rst paper1 whilst others use Forrester's
arrival at MIT's Sloan School (in consequence of which, in
the Summer of 1996 the international conference celebrated
the 40th anniversary of the discipline, appropriately, in
Boston). Whether we use this book to mark the creation
of the ®eld is less important than understanding the enor-
mous signi®cance of its publication. With this account of
the discipline of System Dynamics (the name change came
later in the 1960s) Forrester produced a clear statement of
the whys, wheres and hows. It is therefore worth reprodu-
cing some of the contemporaneous reactions.
The reviewer in the previous incarnation of JORS had
only to spend `£6 15s. 0d.' on his copy. In curious termi-
nology he differentiated between those who seek `better'
ways of doing things and those who insist on the need to
®nd the `best' way. He described Forrester as, `a downright
and uncompromising Meliorizer' (Reference 2, p. 99), that
is, one interested in using simulation to ®nd improvements
( ˆ better). These he contrasts with `Optimizers' whose
concern is analysis and solution ( ˆ best). Whilst not
entirely convinced of Forrester's ideasÐor of `Meliorizers'
in generalÐhe concluded that, `in spite of these drawbacks,
this is an important book, possibly even an indispensable
one . . . There is a strong artery of common sense running
through it, a heart of enthusiasm driving it and a backbone
of achievement supporting it. No intelligent student of
management problems can fail to be rewarded and perhaps
inspired by much of it' (p. 101). In Management Science
the reviewer said; `As historians of greater scholarship may
establish at some future time, Forrester could very well be
credited with providing the missing link between the grand
conceptions of classical Continental economists and the
imaginative inventions of modern electronics wizards. At
the press of a computer button, Forrester listen to the heart
beat, checks the respiration rate, and measures the re¯exes
of a ®rm' (Reference 3, p. 184). The New York Times said
of the book that it had been, `Cited by Professor John R.
Platt of the University of Chicago as `one of the seminal
books of the last 20 years . . . Books that as far as we can
now guess might be comparable in ultimate importance to,
say, Galileo or Malthus or Rousseau or Mill.'
These reactions notwithstanding, Forrester's book has
clear intellectual antecedents and similarities. The form of
analytical and modelling approach at the heat of System
Dynamics derives from the study of electromechanical
servomechanisms which Forrester learned at MIT.4
(There are also interesting similarities to Wiener's work,5
though this was not an actual intellectual in¯uence on
Forrester). In bringing these concepts to bear on social
systems, he was fully aware of Tustin's related attempt to
study economic systems,6 though Forrrester's use of compu-
ter simulation is a major advance. As Richardson7 has
demonstrated, the idea of feedback had been employed
previously by numerous social thinkers; what Forrester did
was to catalyse an evolutionary leap in the form of
feedback thinking which Richardson calls the `servo-
mechanistic thread', in which prime importance is
attached to the study of policiesÐor aggregated deci-
sionsÐand the resultant patterns of behaviour of feedback
systems. (This contrasts with the `cybernetic thread', in
which interest focuses on the role that feedback plays in
processes of communication and control in order to under-
stand events and decisions, an approach exempli®ed in OR
by Beer's work.)

In constructing this evolutionary leap, Forrester offers a
stimulating combination of ideas. System Dynamics models
are presented as representations of the actual physical and
information ¯ows in a system, their feedback implying that,
`decisions are not entirely ``free will'' but are strongly
conditioned by the environment' (p. 17). Rules are carefully
described for the construction of such models. Forrester's
background in electronic engineering provided the perspec-
tive and mental habits both for this and for the rigorous use
of computer simulation models. The models are deemed to
be more like those of engineering than the physical sciences,
Forrester making this discrimination on the grounds of the
aggregated nature of System Dynamics models, so the
application to economics and other social sciences is not
hindered. However, in contrast to his seemingly objective
stance, he proposes that the purpose of a model is to
manifest a worldview, or mental model. In consequence, it
should be focused around a particular issue. A wide range of
data sources is proposed, including data on tangible objects,
held in reports and computer ®les but also knowledge held
only in the minds of system actors, for example values and
goals. The proviso was that, `The individual expressions in a
model should always have meaning in the context of the real
system' (p. 129). The limited ability to share, challenge and
generally utilise mental models would be assisted by articu-
lating personal assumptions as computer simulation models
which would form managerial laboratories in which mean-
ingful experiments could be conducted regarding the inher-
ent behaviour characteristics of a dynamic, non-linear
feedback system. The purpose was therefore not just to
explain but to aid systems re-design, to promote individual
and organisational learning in order to impart `a better
intuitive feel [which] improves . . . judgement about the
factors in¯uencing company success' (p. 45). As a result,
the usefulness, and hence validity, of such models would
only be appropriately judged in a personal way, `the evalua-
tion of improved managerial effectiveness will almost
certainly rest on a subjective judgement rendered by
managers in regard to the help they have received [from
engaging with a model]' (p. 115).
From the perspective of the system dynamicist, this is a
book that must be read. Such reading is not for historical
completeness. Rather, it is required because the breadth of
the ideas contained within it is so great that researchers are
still exploring them. With this book Forrester laid out the
fundamental ideas of the ®eld to the extent that much of the
work since then might be seen as extensions, elaborations
and embellishments of these basic concepts.
Unparalleled as this book is to system dynamicists, it is
appropriate in a review in JORS to view it from other
stances relevant to readers. Let us ®rst consider the links
with the operational research ®eld, ®rst probed by More-
croft.8 The founding ideas of System Dynamics can be seen
today to have much in common with `soft' OR; the `problem
structuring methods' that appeared from the 1970s
Book Selection 1039
onwards.9 Both approaches embrace the notion of a contin-
gent model and are interested in group participation and the
idea of the process of model building being a learning
experience for the participants. A detailed comparative
study of the two ®elds10 suggests that in the late 1950s
when the ideas of System Dynamics were created, they were
so far outside what passed then as OR that Forrester was
correct in judging that for his ideas to ¯ourish, it was
necessary to break away from that larger discipline. This
has allowed the subject of System Dynamics to grow but has
clearly separated it from the world of OR. We see today that
those who practise the ideas in Forrester's book are only
weakly connected to the ®eld of OR. However, now that OR,
at least in the UK, has begun to work through its own
paradigm crisisÐreaching conclusions many of which are
similar to Forrester's earlier ideasÐit is possible to see that
the emerging ®eld of `soft' OR has much in common with
modern System Dynamics. The detailed argument for this
may be found elsewhere (Reference 10) but is summarised
by Forrester himself. Commenting on Lane's descriptions of
`hard' and then `soft' OR, he observed that; `System
dynamics ®ts the latter part of this description much better
than the ®rst part' (Reference 11, p 251). The presentation
of this reviewÐand the later onesÐis a small attempt to
encourage engagement between System Dynamics and OR
practitioners.
We may further develop the links with OR and addi-
tionally relate System Dynamics to the larger ®eld of
systems science and the methodological debates therein if
we also view Forrester's book from the perspective of
social theory. This also affords the opportunity to clarify
some misunderstandings of Forrester's ideas. Forrester
takes an endogeneous view of management problems. In
consequence, we can interpret his ideas as a form of
`systems theory' based on a feedback view of the social
world, taking a realist and nomothetic stance (the terms
used here derive from Burrell and Morgan12 and the full
argument relating to System Dynamics may be found else-
where13). However, the insistence that dynamics are essen-
tially `dis-equilibrium situations' and the interest in
representing the ¯ow and interpretation of information
may be seen as an extension into `integrative theory'.
Most important of all are the three notions of mental
model representation, validation by con®dence and the
provision of learning experiences based on the never entirely
®nished process of model building. These ideasÐclearly
present at the creation of the ®eldÐindicate an embryonic
inclination towards a much more `interactionist' stance. This
inclination has been subsequently developed and made
explicit,14,15 indicating the ®eld's ability to engage success-
fully with pluralist contexts as Dash, an outside commenta-
tor, con®rms.16
I choose to make these observations because a frequent
criticism of this book, of Forrester and of System Dynamics
in general, is that they are a carrying forward of some
1040 Journal of the Operational Research Society Vol. 48, No. 10
ludicrously modernistic, naively technophile 1950s world-
view which seeks to engineer social systems as if they were
natural systems. Keys17,18 offered the view that System
Dynamics as originally created had the same major assump-
tions as hard system approaches but then underwent signi®-
cant change when it engaged with pluralist contexts. This
analysis can be related to the work of Flood and Jackson19 in
which System Dynamics is labelled as being based on
`unitary' assumptions about organisations and `simple'
assumptions about the system under study. These impover-
ished views persist in seeing System Dynamics as, `an
attempt to apply the ideas of control engineering to socio-
economic problems' (reference 17, p. 218), ignoring or
being unaware of the importance attached to the personal
experience of model building and the associated process of
experimental learning. The working through of more `inter-
actionist' forms of System Dynamics can be seen as arising
from an evolutionary re-crafting and development of the
®eld's early assumptions. Keys' almost revolutionary view
of these developmentsÐpredicated on a purely hard systems
grounding in Forrester's bookÐis false. Flood and Jackson's
unitary categorisation (Reference 19) is only consistent with
a reading of System Dynamics that has failed to grasp the
richness of Forrester's ideas or to see what system dynami-
cists do in practice.
I should be clear is saying that there are many outstand-
ing issues relating to System Dynamics, many points of
engagement with OR and with system science and many
criticism of the approach to be made. As I have made clear
previously,10 in some areas I feel that System Dynamics is
not as well developed as other approaches. However, System
Dynamics has its own strengths and these continue to be
enormous.
So, do I ®nd no fault with Forrester's book? Well, it is
certainly written in an old computer language, though that
language was state-of-the-art when the book appeared in
1961. The book contains long model listing when a disk of
models would be helpful. The language of the written text
is austere and requires concentration but it amply rewards
such concentration. It is a hard read but contains many
ideas which need to be re¯ected on and considered care-
fully. It contains many bold conjectures and leaves the
reader in no doubt of the author's con®dence in his ideas.
Its system improvement stance is distinctly modernist but
its rejection of crude optimisation avoids the worst excesses
of naive optimism and did so long before OR changed
signi®cantly in this respect. It is, arguably, not suf®ciently
clear about the need to engage with model owners and to
avoid the creation of expert, authoritative model builders.
However Forrester was hampered in this regard by the
software available when he was writing. Getting managers
to build and run a computer model is a much easier
prospect now with a mouse and a graphical user interface
than it could ever hope to be in 1961. Turn to page 371 to
see what he was working with . . . This criticism is, I would
suggest, a non-criticism.
As described above, it is necessary to make the effort to
see Forrester's ideas in their historical context, to see what
further work he has published and to see how other
practitioners have subsequently worked with his ideas.
Having made such efforts, the striking originality of this
book and the rich mine of ideas that it presents become all
the more obvious. But as we look from today, does the
book live up to the comments made after the original
publication? Forty years may very well be an insuf®cient
interval after which such judgements might be made but
some observations are available. The project of bringing
sophisticated feedback analysis into classical economics in
order to study non-equilibrium states is by no means
complete but shows great promise. The `National Model'
project at MIT aims to provide a causal theory for many of
the macro phenomena seen in the US economy. So far
Forrester has published papers on how he and his research-
ers have gone about this task20 but the expected book on the
subject has yet to emerge, despite fascinating suggestions of
his ®ndings.21 However, as a result of this work, a number of
highly impressive pieces have emerged which indicate that
System Dynamics is asking some fundamental questions of
the assumptions behind economic orthodoxy.22±31
System Dynamics has certainly enabled numerous
groups of managers to `listen to the heartbeat of their
®rm'. This has been the case in the past32 and, with
increasing understanding of group model building
processes33,34 and the contribution of management ¯ight
simulators,35±37 gives every indication of continuing to
grow.38 If we accept as evidence the voice of the market
then we can add that trained system dynamicists have
certainly had little trouble obtaining corporate employment.
And as a London-based researcher, consultant and educator
in the ®eld, I have seen interest in the subject amongst
consulting ®rms rise monotonically and steeply. However,
there are two other areas in which the in¯uence of Forres-
ter's book must be judged now and monitored in the future if
one is to assess its long-term value. The ®rst is the ®eld of
non-linear dynamics and the related areas of chaos and self-
organisation. The importance of insisting on non-linear
relationships in models, and of rigorously deducing the
consequences of them, is a clear message of Industrial
Dynamics and has been repeated on other Forrester
works.39,40. In consequence, whilst interest in these ideas
has spread to other disciplines and have become a manage-
ment fad, system dynamicists have continued to produce
robust analyses of social systems using these concepts.41±45
Finally, no account of the rami®cations of Industrial
Dynamics would be complete without mentioning the
application of Forrester's ideas to global modelling in
World Dynamics.46 This technical account of his work
with the Club of Rome was the A Brief History of Time

of its day and such work has continued and been extended.
Applied to what is perhaps the single most important
domain of social policy modelling, the ideas of Forrester's
World Dynamics have played a critical role in shaping and
deepening public thinking on environmentalism, develop-
ment, pollution and resource restrictions. On that count at
least, we have all been touched by the ideas in Industrial
Dynamics. Finally, Paul Ormerod allows us to return brie¯y
to the in¯uence of Industrial Dynamics on economic
thinking; his comment on the whole Club of Rome work
is that `the true and lasting signi®cance . . . was the devel-
opment of a fundamentally different approach to under-
standing the workings of the economy to that of orthodox
economics' (Reference 47, p. 36).
To summarise, this book is the founding test for a ®eld
which is growing rapidly in use and which has many points
of contact with OR. The book describes the System
Dynamics approach clearly and gives examples. The
modelling language used is now dated and the ideas must
be seen in their historical context. It may not be the
friendliest entry point to the ®eld of System DynamicsÐ
there are journals articles around which can be used for
thisÐbut for those who are serious about learning the core
ideas of the ®eld rather than merely playing with fun-®lled
software, this is a book which simply must be read.
And having been read, it will be returned to and
rexamined again and again, with every such return bearing
rich fruit.
London School of Economics DC Lane
and Political Science
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5 Wiener N(1948). Cybernetics: Or control and Communication
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6 Tustin A. (1953). The Mechanism of Economic Systems.
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7 Richardson GP. (1991). Feedback Thought in Social Science
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18 Keys P (1990). System dynamics as a systems-based problem-
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19 Flood RL and Jackson MC (1991). Creative Problem Solving:
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33 Richardson GP and Andersen DF (1995). Teamwork in Group
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37 Lane DC (1995). On a Resurgence of Management Simulations
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38 Morecroft JDW and Sterman JD (1994). Modeling for Learning
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40 Forrester JW (1987). Nonlinearity in high-order models of
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41 Mosekilde, E, Rasmussen S and Sorensen TS (1983). Self-
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42 Sterman J (1988). Determinstic chaos in models of human
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43 Rasmussen DR and Mosekilde E (1988). Bifurcations and
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44 Mosekilde E and Larsen ER (1988). Deterministic chaos in the
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45 Haxholdt C, Kampmann C, Mosekilde E and Sterman JD
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47 Ormerod P (1994). The Death of Economics. Faber & Faber:
London.
Handbooks in Operations Research and Management
Science Volume 9 Finance
RA Jarrow, V. Maksimovic and WT Ziemba (Eds)
North-Holland, Amsterdam, 1995. xxix ‡ 1165 pp.
Df1 334.00. ISBN 0 444 89084 X
This handbook of ®nance amounts to a primary reference
work for graduate students, researchers and practitioners in
®nancial economics and ®nancial modelling.
The handbook assembles thirty-three chapters, written by
forty-seven leading experts in the ®eld, to cover a broad
range of topics in mainstream ®nancial economics theory
and its application to important ®nancial problems. The
chapters are tutorial and survey-like in nature. Some
provide detailed discussion of important results of the
area. Others generally present the key results with reference
to where to ®nd their development in their original presen-
tation. Every chapter contains pages of references, espe-
cially useful for students or newcomers to the ®eld. I also
found it quite interesting to see, in certain chapters, the
evolution of the theory and practice from ®rst principles to
the state-of-the-art research and empirical work.
The thirty-three chapters are in two broad categories:
capital markets and corporate ®nance. The capital markets
section, comprising twenty chapters, starts with fundamen-
tal models of portfolio selection, CAPM, APT, and their
generalisations. Then it turns to special ®nancial products
like interest rate and stock indices, followed by topics on
market structure, market characteristics such as ef®cien-
cies, and market behaviour. A special chapter is devoted to
a discussion of stock market crashes. The section ends on
the relatively recent area of ®nancial economics: market
manipulation.
The corporate ®nance section deals with various aspects
of corporate ®nance theory and empirical testing of these
theories. These include real options analysis, which extends
classical capital budgeting, corporate ®nancial structure
decisions, investment, effects of tax systems, dividend
policy, mergers and acquisitions, product market competi-
tion, and bankruptcy. The last chapter explores the reasons
behind the US Saving and Loan Crisis in the late 1980s and
early 1990s.
Despite its large volume of over 1000 pages, this hand-
book does not exhaust the ®eld, simply because of the
vastness of the subject matter of ®nance. But it serves well
the purpose of being a detailed road map of principles,
results, observations and current problems in ®nance.
Having constant access to this book is essential for profes-
sionals in this ®eld.
Personally I found it is very encouraging to read the
following statements in the preface of the handbook. `It is
noteworthy that the three Nobel Laureates in Financial
Economics, Professors Harry M. Markowitz, Merton H.
Miller and William F. Sharp all began their careers with
strong operations research=management science back-
grounds and used this knowledge and techniques through-
out their careers.' Financial Economics is currently one of
the most challenging and rewarding application ®elds for
OR, Wall Street and the City, and other ®nancial centres,
are in great need of experts with quantitative skills to help
them interpret ®gures. The editors clearly forecast this
need, and, to inspire more OR people to enter this exciting
area, have produced this handbook of ®nance as a special
volume in the series of Handbooks in Operations Research
and Management Science.
London School of Economics M Yue
Introduction to the Theory of Nonlinear Optimization
(Second Revised Edition)
J Jahn
Springer, Berlin, 1996. vii ‡ 257 pp. DM 128.00.
ISBN 3 540 61407 9
This book aims to present `an application-oriented intro-
duction to the theory of non-linear optimization'. I am
afraid that the applications are not what an OR person
would like to see, and they are very sparse indeed.

The book is really only suitable for a theory course.
Since most of the results are derived in the setting of
Banach spaces there is quite a lot about control problems,
but again the interesting applications are thin on the
ground. There is an example which shows that the curve
of the shortest length connecting two points is a straight
line, a result which the author describes as `not surprising'!
The contents are as follows. Chapter 1 gives some toy
examples. Chapter 2 presents some existence theorems for
minimal points, whilst the overlong Chapter 3 discusses
several concepts of the derivative. Chapter 4 moves on to
the study of tangent cones and Chapter 5 presents a
Book Selection 1043
standard discussion of the Lagrange Multiplier approach
to constrained optimization. Chapter 6 discusses duality,
while the ®nal chapter presents two special optimal control
problems. The bibliography is good.
If you are looking for a well written fairly abstract
introductory text without any references to algorithms
then this is a pleasing volume. If you want a book that
will show you how to solve non-linear programming
problems, this book is not for you.
Dash Associates RC Daniel
and University of Buckingham