Systems Analysis

- Why Should I Care

Studying scarcity, choices and trade-offs is important. However, the fact that we are over-producing green house gases is telling that we aren't focusing enough on the economic system, and the secondary productions that cause negative outcomes for humans.

- This Chapter Has 3 Parts

• Systems
• Economic Systems
• Scope of Systems

- What is Systems Analysis ?

The study of systems is called Systems Analysis or Industrial Dynamics, and it has been developed mostly in the field of engineering. We believe it is very useful as a basic frame of thought to build an economics course, especially to discuss environmental issues. While many economists have been focusing their efforts on the traditional definition of economics, that of a study of the allocation of scarce means in the service of competing ends, the issues of global warming and environmental protection compel us to analyze the economic system itself.

• Systems

Analyzing systems is an important aspect of this book. So, let’s define what we mean by that. First, what is a system?

A system is a set of components and relationships that operate together to make something. Their operations may also react to other components, or other systems, from the outside.

A system is made of seven components: Inputs, Processors, Outputs, Control, Feedback, Environment, and Boundaries.

1. Inputs: Objects that go into production.
   1. Natural Resources, such as light, water, and minerals.
   2. Transformed inputs, such as lumber, food ingredients, petroleum, and metals.
   3. Intangibles, such as information, art, recipes, knowledge and human capital.
      
      
2. Processors: What transform inputs into output.
   1. Human Labour, such as hourly-paid workers, family labour, or non-paid labour.
   2. Machines and Equipment, such as appliances, vehicles, manufacturing, computers, and software.
   3. Instruments and Tools, including kitchen utensils, construction tools, and scientific instruments.
      
      
3. Outputs: Products that are the outcome of inputs
   1. Goods are useful transformed objects produced by a system
   2. Bads are unintended secondary productions that are harmful to humans or nature
   3. Services are intangible products meant for consumption
   4. Intermediate Goods and Services are meant to be used as inputs or processors in other production systems
   5. Final Goods and Services are meant to be consumed by humans
      
      
4. Control: People who decide which inputs and processors to use, and which outputs to produce.
   1. Private sector leadership, including non-profits, small businesses, large corporations. CEOs and managers.
   2. Public sector leadership, including Prime Minister and Cabinet, CEOs and managers of government-owned institutions, city Mayors.
   3. Families and Households who produce inputs and outputs.
      
      
5. Feedback: Information relayed to the control function about production quantities, qualities, and other factors
   1. Non-verbal feedback includes lineups at storefronts, empty shelves, excess inventory, rapid wear and tear (ex: road use), congestion, etc.
   2. Informal feedback can be comments made to producers/controllers, word-of-mouth, and social media.
   3. Institutionalized feedback includes surveys, town hall meetings, and focus groups.
   4. Civil society, labour unions, environmental groups, social activists, provide detailed information and feedback
   5. Price feedback includes price bubbles, rebates, and liquidation strategies.
      
      
6. Environment: Objects outside the system that can affect it
   1. Physical environment includes landscape, climate, weather, and availability of natural resources.
   2. Political environment includes legal regime, political institutions, tax levels,
   3. Social environment includes cultural institutions such as family, religion, language, moral constructs, sports, arts, and culinary habits.
      
      
7. Boundaries: Limitations of the system
   1. Finite nature of natural resources, such as land, minerals, wind, solar energy, water, and living organisms.
   2. Demographics are defined as population, which grows with births, increased life expectancy and immigration.
   3. Technology includes knowledge, competencies, skills, machines, computers, robots, buildings, roads, railways, ports, and other infrastructure.

• Economic Systems

An economic system is a social institution which deals with the extraction and transformation of resources to produce goods and services for consumers in a particular society. The economic system is composed of people, social customs, ways of communication, and institutions, with their relationships to natural resources, knowledge, tools, machines and technology.

 

Summary Table

Component                 Role                                        Example

Economic systems      To produce                              Factories, Farms, and Office Towers

Inputs                          What goes in                            Natural Resources

Processors                  What transform inputs              Workers and machines

Control                        Who decides                             CEOs, Civil Servants, and Politicians

Outputs                       What comes out                        Goods and Bads

Feedback                    What people want                     Comments, Prices, and Lineups

Environment               What surrounds you                  Landscape, Laws, Taxes, and Culture     

Boundaries                  What limits you                         Number of workers and Technology

Exercise: Pizza Dinner

IMPORT IMAGE???

OR SET ASIDE AS IN-CLASS ACTIVITY ?

This example shows us how pizza is produced, simple enough. That's what happens in one location, by one producer. But an economy is a more complex system, since it is the intertwined flow of objects between these individual systems. For example, inputs into pizza making, like flour and cheese, are outputs of other systems, such as a wheat mill, and a dairy farm. Same for ovens: they were produced by a machine plant, where steel and glass were used as inputs.

On the other end, pizza is an input for other activities. Humans need to eat for energy and biological needs. The human body is a system, where food and air are inputs. Human output includes producing intangibles such as art, singing, talking, screaming, running, walking, writing, building things, baking, cooking, punching, moving objects... Human output also includes physical matter (tangibles): exuding heat, exhaling CO2, transpiring sweat, shedding hair, and releasing urine and stool.

What makes the overall system even more complex is that there often is not any finality to the flow of these objects. Everything we produce ends up as an input, in some way. Humans eat to live, but they also are part of the production process. Humans are important as labour, in the process of making objects. Since food is input for labour, the pizza could very well be an output of the pizza restaurant, and an input for labour in that restaurant. If we were to draw the entire web of these flows, the result would probably be very complicated to actually model everything into a flow chart.

What about waste?

An important thing here is that we don’t lose track of both the primary and the secondary productions, both the GOODS and the BADS. Many times, an industrial facility will find a way to reuse a secondary production, especially if it can resell it. For example, one important waste in the process of making chocolate is called cocoa butter. The famous Swiss company Nestlé was the first to try to make a product with mostly cocoa butter: they invented white chocolate. Instead of throwing the butter out, it becomes an input for another, new product. In this case, a BAD was turned into a GOOD. And in this case, reducing waste has added lots of zeros to Nestlé's bottom line (and maybe a few inches to peoples waistline).

• Scope of Systems

In economics, we are always studying system with more or less scope. We can narrow the focus of the analysis, depending on the scope we are trying to achieve. Usually we will look at three types of systems : the agent, the industry, and the aggregated economy.

Agent

The economic agent, whether it’s a consumer buying dinner, a company that manufactures chairs, or an office where legal services are offered, is some kind of individual actor. This is the first-level system. Sometimes economists refer to the producer as the ‘firm’. Some companies or organizations have many plants, and many offices so economists need to be precise about the scope of their outlook when defining their research problem. When analyzing a single producer's activities, one is also considering the role of buyers, also called consumers.

The sub-field of behavioral economics studies individual human behavior, using insights from psychology, to better understand patterns in consumption, choices, and well-being.

Industries

Next, you can look at certain sections of the economy, which we call industries. These are groups of producers who are in the same type of business. Their products are similar, or they are part of the chain of production. Examples include the banking industry, the aerospace industry, or the food transformation industry. When you study an industry, you tend to focus on the level of competition between producers, and the overall output of the system. You also have to consider the industry as a system that operates within a larger context, such as other industries, types of regulations, the political regime, and cultural institutions.

The sub-field of micro-economics focuses on agents, and on industries, analyzing issues such as competition levels, optimal regulations, profits, and consumer welfare. The role of freely adjusted (vs. fixed) prices is often the principal feedback mechanism discussed by micro-economists at this level of analysis. There are many specialized sub-fields, which concentrate on specific industries, or topics, such as financial economics, labour economics, innovation economics, development economics, welfare economics, and international economics, to name a few.

The sub-fields of environmental and ecological economics focus on the policies and regulations needed to reduce pollution, encourage the re-using of waste, and stem the degradation of natural environments.

Aggregates

Finally, you can look at economic systems from an aggregated perspective, usually with a geographical definition, such as the city-region, the province, or the national/state level. Economies in this regard have inputs, processors, and outputs, but their variables will be measured and analyzed in aggregates, such as total imports, total employment, total physical capital, total domestic consumption, total exports, and total inventory.

The sub-field of economic geography (also called urban and regional economics) are interested in the spatial relationships associated to income, wealth, production, trade and consumption. Cities, in particular, are a main object of discussion, since they are important physical manifestations of economic activity.

The sub-field of macro-economics usually focuses on provincial, state, and national-level economies. It discusses the role of controlling institutions such as legislative assemblies, elected parliaments, the office of the Prime Minister and Cabinet, and the central bank. An emerging sub-sub-field is ecological macro-economics, which analyzes the relationship between the aggregate economy and the earth's capacity to sustain human life.

Table. Economics and its sub-fields

Type of System	Agent	Industry	Aggregate
Economics Sub-Fields
behavioral	x	x
micro-economics	x	x
environmental & ecological	x	x	x
economic geography		x	x
macro-economics			x

- Green Policy

This first lesson on economic systems is the cornerstone of changing our economy. Most of our BADS are toxic to humans. Scientists call this pollution. In an ideal world, all of these secondary productions would be either banned, or used as an input to make something else.

This is exactly how nature works. Nature is an economic system. Everything in nature is producing something. Trees produce energy-rich carbon material (wood) and oxygen. The beautiful aspect of nature is that there are no wastes, no BADS. Carbon is biodegradable, so if a tree dies, the carbon goes back to the atmosphere, and the earth, and then probably back to another tree which will grow in its place.

About the air, trees use carbon dioxide (CO²) in the air and turn it into oxygen. That becomes an input for other living mammals, such as humans. When we breathe, our oxygen is transformed into CO², an output, which is an input for trees.

In nature, any living organism that does not create outputs that are beneficial to its environment, as inputs for other organisms, will die. The most successful organisms are those that produce outputs which are perfect inputs for its neighbours. This view of production is part of a more recent branch of study in engineering and science called Bio-mimicry.

One easy way to implement this in your household is to purchase products where all the waste is both bio-degradable and compostable. Of course, this will eliminate all the waste in your garbage pail, and the plastics in your recycling bin.

Compost is an input for horticulturalists, gardeners, and landscapers. These tradespeople actually pay money for compost, when our cities could (and many do) be providing it for free, by picking up brown bins every week and producing compost in municipal facilities. Humans should look into these solutions more carefully if they wish to keep growing their population on earth. If we wish to keep having babies, living longer lives, and to keep growing our quality of life, we have to adapt!

- Climate Change Solution

CO2 for sale! Anybody need some CO2? Anybody?

Reducing our BADS across the board is important. However, there is a specific type of production that scientists don’t always designate as pollution because it’s not that toxic to humans. Theses gases actually allow us to exist on Earth.

Nonetheless, the overproduction of greenhouse gases could lead to the demise of the human species. The greenhouse gases (GHG) that keep the earth warm are primarily water vapor (H2O), carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), and ozone (O3). As you know already, our cars and trucks run on fuel, which emit carbon dioxide. Our meat comes from cattle that emit methane. We don’t emit these gases on purpose. They are secondary, and quite useless, productions.

To solve Climate Change, one must take a deep look at the economic systems that produce these particular BADS to either stem their emissions, or to divert them back to the economy as INPUTS. This latter solution is called the Circular Economy.

If we don’t solve Climate Change, a cascade of events will eventually affect many sectors of the economy. If one system is made of seven components, an economy can be seen as an eco-system: a collection of systems that interact and mostly depend on each other. Using Systems Analysis, it is possible to chart and predict the effects of unmitigated climate change on our societies. In the US, the advent of more heatwaves and hurricanes will have a damaging effect on farming, oil refining, electricity grids, and water treatment. A critical report from the US government outlines the sector interactions using a complex systems analysis, to help understand the effects of global warming over the next century (USGCRP, 2018, Ch. 17).

- Democracy Booster

Any political system rests on some type of popular support. Whether it’s a community-based non-profit association, a town, a small country, a federation, or a military regime, anyone who controls the system must be weary of his or her allies, and his or her foes. Support is the key.

When you study the economic system, some parts may seem to be mechanical, and they rightly are, such as the flow of inputs into processors, transforming raw materials into final products. True. However, any change made to the system is guided by feedback, and control mechanisms.

To improve the democratic process, one needs to keep the controllers – the people in charge – accountable to everyone else. You need to design the system so that the controllers have to listen; they need to take feedback into account. One way is to have open, free, elections to choose the people in charge. Another way, may be to have the possibility of changing the people in charge. This is why an organization may have a board of directors, who can replace the Chief Executive Officer (CEO). Still, another way, may be to create incentives that will guide the people in charge to respond to the wants and needs of the many.

Most of our political systems have advantages and disadvantages. It’s up to us to improve these systems so that feedback is not ignored in economic decision making.

Wrap-Up

Economics attempts to understand systems of production of output (goods and services). Those systems produce using inputs, and processors, are subject to feedback and control, and must comply with their environment and boundaries.

- In-class Exercise

Think of a company that makes chairs.
Identify 2 examples for each component. List 2 items per component.
Use a dollar sign to identify the output that is sold on a market.

Component	Item 1	Item 2
Inputs	Wood	Leather
Processor	Bandsaw	Labour
Outputs	Chair	Air pollution
Control	Manager	Stockholders
External Environment	Local tree varieties	Local climate for indoor/outdoor needs
Feedback	Client comments	Trade Magazine Reviews
Boundaries	Size of the bandsaw	Quantity of available materials, labour

- Cheat Sheet with Memory Helper

System:             A set of objects that work together to process inputs into outputs, in a given environment and within boundaries.

Resources:        Objects and services used as inputs to produce final products.

Products:          Goods and Services.

Goods:             Physical, or tangible, outputs of production used as final consumption by people.

Bads:                Outputs that are not meant for final consumption, but can either be waste, or a reusable input for other productions. Also: externality.

Services:           Intangible, or non-physical, outputs of production used as final consumption.

Model:             An artificial, and controlled, environment, allowing the economist to run simulations. The model thus predicts relationships between variables.

- References and Further Reading

Benyus, J. (2005). Biomimicry’s surprising lessons from nature’s engineers. Ted Talks. https://www.ted.com/talks/janine_benyus_shares_nature_s_designs

Daly, H. E., & Farley, J. (2011). Ecological Economics, Principles and Applications, 2e edition. Washington: Island Press.

Forrester, J. W. (1961). Industrial Dynamics. Martino Fine Books; Illustrated edition (Reprinted 2013).

Stiglitz, J. E. & Walsh, C. E. (2006). Economics, 4th ed. New York: W. W. Norton & Co.

USGCRP. (2018). Chapter 17: Sector Interactions, Multiple Stressors, And Complex Systems. In Impacts, Risks, and Adaptation in the United States: Fourth National Climate Assessment, Volume II [Reidmiller, D.R., C.W. Avery, D.R. Easterling, K.E. Kunkel, K.L.M. Lewis, T.K. Maycock, and B.C. Stewart (eds.)]. U.S. Global Change Research Program, Washington, DC, USA, 1515 pp.

Xenophon. (2012). Oeconomicus. Hardpress Publishing. Available on Amazon.ca.