Economics: Thinking in Systems

Perhaps the hardest thing for people to understand is the interconnection between things in our world.  Our brains just don’t seem to be wired to fully comprehend multiple layers of complexity.  Sociologists refer to this as dealing with “systems” and emphasize that in order to manage well in our world we have to learn how to engage in “systems thinking.”  However, most people, including many in leading roles in society, don’t follow the literature in sociology, so the concept of systems thinking is not well understood.  Nevertheless, some people are better at thinking this way than others.  For the good of society we have to hope that such people are elected to public office, or find their way to positions of power and influence by other means.  Because the future of our grandchildren now depends on how well we manage within the various systems in which we live.

 Most of all, the future depends on how well we understand what is going on in one of the most important systems in our lives—the economic system—and on how well we adjust our thinking in order to deal with the problems there that are now reaching monumental levels of seriousness and complexity.  And it all comes back to the way we use energy.

 As I have said several times in previous posts, energy is a factor in our lives different from all others.  It literally determines what we are able to do in the other parts of our lives.  I pointed out, again many times, that what we are now able to do in our industrialized society has been determined by our discovery and use of a very concentrated source of energy from fossil fuels.  From this fact comes another important understanding: the economic system in which we live has been made possible by the energy we have had available to us.

 However, as we built this system on the back of our energy supply, we made sure of one thing.  We kept the price of the energy low so that more people could enjoy more of it, and in that way we raised our standard of living.  It also allowed those who owned or controlled the energy supply to become very rich and powerful.  But by and large most people did not mind that too much, because most people most of the time were living quite well from this arrangement.

 Now, however, the reality that we live in a world of systems is asserting itself, and we have begun to notice that as our economic system has continuously expanded, other things around us, including a lot of people in other parts of the world as well as many closer to home, are not doing so well.  Also, our air is not as clean as it used to be.  We notice that weather patterns are changing.  We hear that plant and wildlife species are disappearing.  We are told that the oceans are warming and becoming more acidic, threatening fish species.  We know that we have piles of waste all around us that are hard to get rid of.  And we hear government reports about piles of something else less tangible than the junk around us—mountains of debt.  And we look at our own financial standing and see that we are trying to scramble over our own heaps of personal debt.  As these things mount up in our minds, we begin to wonder whether something is not out of balance in the world.

 More about Systems

 Unfortunately, the evidence is clear that there are a lot of things out of balance in the world.  If we are ever going to make an improvement, it is essential that we understand the underlying causes.  This brings us back to the subject of “systems” and the importance of “systems thinking.”

 What is the definition of a system?  Essentially, a system is a set of interrelated elements that  operating together make a unified whole.  Individual things—like plants, animals and people—are systems and at the same time cannot be fully understood apart from the larger systems in which they exist.  Most systems are “open,” which means that they are interacting with other systems in two ways, both in receiving inputs and in giving outputs.

 Coming now to the economy, Peter Victor in his book Managing without Growth (2008) provides a good explanation of an open system: “An open system is any complex arrangement that maintains itself through an inflow and outflow of energy and material from and to its environment.  You and I are open systems.  We rely on food to build and maintain our bodies and for energy, and we produce waste that must be discharged.”

 Victor goes on to explain that “everything that lives is an open system.”  In addition, human-made artefacts like cities and towns are open systems.  Similarly, economies are open systems.  They take in energy and material as inputs, which are used in many ways to provide goods and services.  Eventually, all the materials and energy that enter the economy are degraded, and they have to be returned to the environment as waste.

 Now, this is where we run into a major problem, which after more than 100 years of continuous expansion of the world economy as a whole, has reached the point where it is destabilizing the planet.  The problem occurs because while all the economies of the world are open systems, they “exist within and depend upon planet Earth, which is a closed system.” [my emphasis].  This means that the Earth cannot dispose of wastes that build up within it.  Some breakdown and recycling occurs, but ultimately all of the outputs from human economies stay on the planet, including so-called green-house gases that are trapping the heat energy that continues to come in from the sun but can’t be fully radiated back into space.  So the planet gets hotter.

 Systems as Nests

 From what has been said above, we understand that the world in which we live is an unimaginably complex mass of open systems (people and their economies; plants, forests, animals and their ecosystems; etc.) and somehow we have to live together, because the largest system in which we all live is the Earth, and it is closed, so there is nowhere for us and our waste to go.  The best way to understand this is to see that smaller systems (like plants and animals) are contained within larger ones (like forests and ecosystems).  In this way, systems are said to be “nested.”

 This is an important point, because it enables us to build up a picture of how things work in the world.  We can visualize three major systems nested together—the economy, society and Nature.  Originally, if we go back far enough, there was nature alone without people.  But when Homo sapiens evolved and formed into communities, then there were two major systems with the human social system nested inside Nature.  The small human communities had their small local economies of a sort, but as Peter Victor points out, “for most of humanity’s history the economic and social were intertwined.”  It wasn’t until the beginning of industrialization in 18th century Britain that the “economy” became something that could be distinguished from the rest of society.  Now that industrialization has spread around the world, we can truly see the third system, the economy, nested within society, which is nested within Nature.  Diagramatically, Victor pictures the arrangement as seen below.



The reason for the broken lines and jagged edges is to show that the economy can reach directly into Nature, as, for example, when it impacts on the air we breathe.  However, the most important thing to understand from the figure is that although the economy is shown at the centre of the circle, it is not the most important of the systems.  Rather, it is the most dependent.  If this dependent system, the economy, begins to erode the society and the natural world on which it depends, then the implication is that we need to do something about redesigning how the economy works.

 We now have a massive amount of evidence that the economies of industrialized societies are not adequately working for the good of the societies in which they are embedded.  There is much to be proud of in terms of social and economic progress over many generations, but the ways in which our economies are now failing to guarantee a good future for our grandchildren is extremely disconcerting.  They are having negative impacts on Nature locally, while collectively they are destabilizing the entire natural world and threatening the viability of life for future generations.

Victor points out that while the founders of modern economics writing in the 18th and 19th centuries (Adam Smith, Thomas Malthus, David Ricardo and J.S. Mill) understood the links between the economy, society and Nature, “unfortunately most economists who followed concentrated on the internal workings of the economy, giving the false impression that the economy is disconnected from society and the natural world.”  All of us living today were born into this kind of economic system and tend to accept it as it is, not appreciating that it has been designed and changed over many years by human intervention.

 So the challenge facing all of us today when the negative impacts of our economy on Nature and society are becoming more and more evident, is to be able to step back and see how the economic system might be redesigned and otherwise changed, so that it works not only for us today but also for the generations who follow us.  Central to that rethinking of the economy will be consideration of the way modern economies depend for their operation on continuous growth.  Given that the economy operates within the closed and finite system of planet Earth we will need to ask whether continuous economic growth is, in fact, an impossibility, and therefore not sustainable very much further into the future.

 There are a myriad of questions to consider in such a re-examination, not the least of which will be to distinguish between quantitative and qualitative growth as a way to design the economy of the future.  I will turn to these matters in following posts.  For now I would like to conclude with some wisdom about systems from the late Donella Meadows in an article in Timeline, March-April 2004 entitled “Dancing with Systems.”  Donella Meadows was a great systems thinker and is perhaps best known as one of the authors of the Club of Rome Report of 1972 entitled The Limits to Growth.  I will have more to say about this Report in future posts, but for now would like to share other thoughts from Donella Meadows about participating in systems.

 “Living successfully in a world of systems,” she says, “requires more of us than an ability to calculate.  It requires our full humanity—our rationality, our ability to sort out truth from falsehood, our intuition, our compassion, our vision and our morality.”

 That really says it all.  We will have to do a lot of sorting of truth from falsehood as we go forward and will have to engage our full humanity and our compassion as we chart a path in which we include not only our own best interests, but also those of future generations, as well as the best interests, and even “rights,” of the natural world.  

 For most of us growing up in urbanized society with an economic system fixated on material growth of money and manufactured products, the idea that the natural world of forests, oceans, and animals might have “rights” is, perhaps, strange.  But what it means is the understanding that a tree, for example, or the forest in which it stands, has a right to be a tree and a forest, which means we have to consider that right against our right to cut it down to make something else out of it.  Dr. Seuss described that idea very well in his poem The Lorax, which I have mentioned before in this blog, and which has just been released as a movie.  In Dr. Seuss’s story, the truffula trees had the Lorax to speak for them and assert their rights.  It didn’t do much good against the greed of the Once-ler who cut them all down, but at least they had a spokesman in the Lorax.  Who is speaking now for our trees and forests, if not us?

May we indeed develop the courage to speak up for the trees, forests, oceans and all of Nature, and may we acquire the wisdom to learn how to dance joyfully in the systems, natural and human in which we live.

 In the next post we will look at the foundation of economics as a field of inquiry and means of organizing and explaining human activity in industrialized society.  Where it began in the late 18th century and how it has changed into our own time constitutes the major story of human impact on the planet.  If things are to be better for our grandchildren in the future, we must as citizens understand these issues and take charge of introducing necessary change before human activity overwhelms the natural world on which it depends

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4 Responses to Economics: Thinking in Systems

  1. John Wong says:

    Thanks for the posting Desmond. A good book to read is The Last Child in the Woods by Richard Louv, where he coined the term Nature Deficit Disorder, suggesting that a disconnect from nature causes many behaviour problems in children, not to mention the increase in obesity due to inactivity, and having no one to care for the forest in the future generations, if the people are not using them.

  2. Geraldine Schwartz says:

    I read the latest blog on the importance of systems thinking with great interest. I really learned something important that our open systems are nested within a closed system, a finite Earth. Given that information, your previous essay on conservation makes clear and urgent sense as a bridge of hope between now and our ability to find an energy source that can work within a closed system. As a person geared to act, I would like to discuss ways to promote this option. Thank you for the precious clarity you provide. It is the first step in thoughtful action.

    • Thanks, Gerri. You are right, of course, that what we must do is take the understanding about systems and use it to guide us in action about the innovations needed to devise a sustainable economic future for ourselves and our grandchildren. The following posts will explore this further, but it is good to be thinking about solutions as we go.


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