Neoclassical Economics versus System Dynamics Economics

Nipawin - Friday, August 31, 2001 - by: Mario deSantis

Keynesian

"I still think and say that Keynesian ideas about how the economy works and what policies can make it work better are relevant today" -- James Tobin, 1981 Nobel Prize Winner for Economics

equilibrium
Our neoclassical economic science based on the concept that the market will find automatically its equilibrium if left to itself is baloney. Because of this misconception of a natural predisposition for the market to stabilize and provide the best allocation of resources, economists have been building statistical optimization models to find the equilibrium of any subpart of the economic environment.

deterministic
In pursuing the solutions (equilibrium points) of these statistical optimization models, our economists have artificially supported a deterministic approach to our political environment and this is why our politicians have been misdirecting and cheating the people in their economic policies, and especially so in the last ten years of economic globalization.

people
Economy is a social science where the welfare of people is not measured in mathematical or statistical terms. Therefore, mathematics or statistics must be used as tools to help us be more intelligent and creative; mathematics or statistics must not be used to build economic models, per se, to either predict or determine our future.

system
dynamics
Three years ago I discovered the field of system dynamics as described by Jay Forrester and I understood how deeply important was Forrester's concept that any system can be imagined in terms of interrelated flows and stocks changing over time ( think of our waters where rivers are flows and lakes are stocks; or think of a company where profits are flows and owners' capital is a stock; or think of our human understanding where learning is a flow and knowledge is a stock...). I know now that we can use the concept of system dynamics to understand our social and economic environment.

I am
learning
While the optimization of mathematical or statistical economic models are focused in finding deterministic solutions or equilibrium points and predict the future, system dynamics models are focused not in predicting the future, but in understanding the behaviour of the flows and stocks of the economic system over time. Metaphorically, I associate the word 'telling' to the mathematical and statistical models, and the word 'learning' to system dynamics models. I can say, my readers, how aggravated I feel when I hear the phrase 'I told you so' and how much happier I feel when I hear the phrase 'I am learning.'

interest
rates
Few days ago we mentioned of the stupidity of our monetary economists who, disregarding the inertia and time delays intrinsic in the economy, wanting to use the changing of the central banks' interest rates in order to drive the economy and fight inflation. Yesterday, as I was researching on the 'Tobin's tax' as a means to reduce the speculative components of international transactions on foreign currencies, I was heartened to find out this quote by Nobel Prize Winner Economist James Tobin

effect on
capital investment

"The 'Yale approach' to monetary and financial theory has been widely used in empirical flow-of-funds studies and in modeling international capital movements. Our approach also explicitly recognizes the stock-flow dynamics of saving, investment, and asset accumulation, as in my 1981 Nobel lecture.... Without these effects, macro stories about policies and other events are incomplete. The bottom line of monetary policy is its effect on capital investment, in business plant and equipment, residences, inventories, and consumer durable goods. The effect is not well represented by the market interest rates usually cited, or by quantities of money or credit."

taxes
We must get rid of the speculative interest of our financial environment. One way to offset these speculations would be to play with taxes similar to the one proposed by Tobin. However, a better way to play against these speculations would be to use the simple tool of system dynamics in every facet of our living, beginning with the education of our children.

------------------References

Related social and economic articles published by Ensign

AMES TOBIN, from 'Lives of the Laureates, Seven Nobel Economists' Edited by William Breit and Roger W. Spencer, The MIT Press, Cambridge, Massachusetts, London, England, 1986 http://cowles.econ.yale.edu/archive/people/tobin/lives86.htm

EDITORIAL: Tobin Tax time, Twenty-five years ago, Nobel Prize-winning economist James Tobin proposed a modest tax on speculative financial transactions. http://www.policyalternatives.ca/publications/articles/article185.html

The System Dynamics Society, http://www.albany.edu/cpr/sds/

System Dynamics / Systems Thinking Mega Link List, by Günther Ossimitz http://www-sci.uni-klu.ac.at/~gossimit/links/bookmksd.htm


Nipawin - Friday, August 31, 2001 - by: Mario deSantis

Keynesian	"I still think and say that Keynesian ideas about how the economy works and what policies can make it work better are relevant today" -- James Tobin, 1981 Nobel Prize Winner for Economics

equilibrium	Our neoclassical economic science based on the concept that the market will find automatically its equilibrium if left to itself is baloney. Because of this misconception of a natural predisposition for the market to stabilize and provide the best allocation of resources, economists have been building statistical optimization models to find the equilibrium of any subpart of the economic environment.

deterministic	In pursuing the solutions (equilibrium points) of these statistical optimization models, our economists have artificially supported a deterministic approach to our political environment and this is why our politicians have been misdirecting and cheating the people in their economic policies, and especially so in the last ten years of economic globalization.

people	Economy is a social science where the welfare of people is not measured in mathematical or statistical terms. Therefore, mathematics or statistics must be used as tools to help us be more intelligent and creative; mathematics or statistics must not be used to build economic models, per se, to either predict or determine our future.

system dynamics	Three years ago I discovered the field of system dynamics as described by Jay Forrester and I understood how deeply important was Forrester's concept that any system can be imagined in terms of interrelated flows and stocks changing over time ( think of our waters where rivers are flows and lakes are stocks; or think of a company where profits are flows and owners' capital is a stock; or think of our human understanding where learning is a flow and knowledge is a stock...). I know now that we can use the concept of system dynamics to understand our social and economic environment.

I am learning	While the optimization of mathematical or statistical economic models are focused in finding deterministic solutions or equilibrium points and predict the future, system dynamics models are focused not in predicting the future, but in understanding the behaviour of the flows and stocks of the economic system over time. Metaphorically, I associate the word 'telling' to the mathematical and statistical models, and the word 'learning' to system dynamics models. I can say, my readers, how aggravated I feel when I hear the phrase 'I told you so' and how much happier I feel when I hear the phrase 'I am learning.'

interest rates	Few days ago we mentioned of the stupidity of our monetary economists who, disregarding the inertia and time delays intrinsic in the economy, wanting to use the changing of the central banks' interest rates in order to drive the economy and fight inflation. Yesterday, as I was researching on the 'Tobin's tax' as a means to reduce the speculative components of international transactions on foreign currencies, I was heartened to find out this quote by Nobel Prize Winner Economist James Tobin
effect on capital investment	"The 'Yale approach' to monetary and financial theory has been widely used in empirical flow-of-funds studies and in modeling international capital movements. Our approach also explicitly recognizes the stock-flow dynamics of saving, investment, and asset accumulation, as in my 1981 Nobel lecture.... Without these effects, macro stories about policies and other events are incomplete. The bottom line of monetary policy is its effect on capital investment, in business plant and equipment, residences, inventories, and consumer durable goods. The effect is not well represented by the market interest rates usually cited, or by quantities of money or credit."

taxes	We must get rid of the speculative interest of our financial environment. One way to offset these speculations would be to play with taxes similar to the one proposed by Tobin. However, a better way to play against these speculations would be to use the simple tool of system dynamics in every facet of our living, beginning with the education of our children.

------------------References
	Related social and economic articles published by *Ensign*

	AMES TOBIN, from 'Lives of the Laureates, Seven Nobel Economists' Edited by William Breit and Roger W. Spencer, The MIT Press, Cambridge, Massachusetts, London, England, 1986 http://cowles.econ.yale.edu/archive/people/tobin/lives86.htm

	EDITORIAL: Tobin Tax time, Twenty-five years ago, Nobel Prize-winning economist James Tobin proposed a modest tax on speculative financial transactions. http://www.policyalternatives.ca/publications/articles/article185.html

	The System Dynamics Society, http://www.albany.edu/cpr/sds/

	System Dynamics / Systems Thinking Mega Link List, by Günther Ossimitz http://www-sci.uni-klu.ac.at/~gossimit/links/bookmksd.htm