Economics: A Systems Thinker's View

From SystemsWiki

I have repeatedly stated that I need to get out of the business arena and create some Systems Thinking perspectives relating to another subject. The problem is I don't think there's another subject I'm really that familiar with. As often seems to be the case insight arises from confusion, at least when you're lucky. So, it dawned on me that what might be most instructive, for a number of reasons, would be to sort of chronicle my attempt to understand Economics from a Systems Thinker's perspective. I thought that in addition to being enlightening to me, as I'm not sure how I think, others might benefit from my wandering through the Economics landscape. As such, what follows is probably a whole set of pages that chronicle my journey. Where this leads we'll have to see.

My first step was to charge off to Wikipedia and find out what somebody thought Economics meant. Here are the three pieces I felt were worth keeping, after I threw away a lot words I felt didn't contribute much to the definition. There are probably a few more I can get rid of. I just need to learn that they're irrelevant.

Economics is the Social Science that studies the production, distribution, and consumption of goods and services. Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. Scarcity means that available resources are insufficient to satisfy all wants and needs. Absent scarcity, and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choices as they are affected by incentives and resources.

Economics is divided into two broad general fields: Microeconomics and Macroeconomics.

Microeconomics is a branch of economics that studies how households and firms make decisions to allocate limited resources, typically in markets where goods or services are being bought and sold. Microeconomics examines how these decisions and behaviours affect the supply and demand for goods and services, which determines prices; and how prices, in turn, determine the supply and demand of goods and services.

Macroeconomics is a branch of economics that deals with the performance, structure, and behavior of the economy of the entire community, either a nation, a region, or the entire world. It is the study of all the aspects, namely the behavior and decision-making, of entire economies.

Economics

From the definition of Economics above, disregarding for a moment Micro and Macro Economics, the implication seems to be that of a Reinforcing Loop (R1) as depicted in Fig. 1.

Fig. 1 - Economics Definition

Fig. 1 indicates that production adds to consumption and consumption adds to production, though there are a couple ideas that come to mind from looking at this diagram. First the definition of Economics refers to scarce resources, which are not depicted in the diagram. The resources piece is added in Fig. 2.

Fig. 2 - Production Constrained by Resources

Fig. 2 implies that resources contribute to production and production subtracts from resources creating a standard Balancing Loop (B2). This is fine until resources are consumed to the resource limit. Once the resource limit is reached, depending on the nature of the resources, one of two things happens, either there are no longer any resources left to add to production, or if the resources are replenished at some rate, production is limited to the resources available.

Also, from experience there seems to be no limit to our capacity for consumption so there must be something that limits consumption and at the same time encourages production. It seems that price as depicted in Fig. 3 is something that will do just that.

Fig. 3 - Consumption & Production Operate Through Price

In Fig. 3 the Reinforcing Loop (R1) has been decomposed into two Balancing Loops (B3) & (B4). In this structure, which is a typical Indecision Structure, consumption adds to demand which adds to price. Price then encourages production which increases supply. The increase in supply tends to subtract from price and the lower price then subtracts less from consumption essentially increasing it. As such the two Balancing Loops (B3) & (B4) essentially operate as a single Reinforcing Loop, which is a good thing because that's what they replaced.