Resources, Financial Risk and the Dynamics of Growth

Systems and Global Society

Roberto Pasqualino, Aled Wynne Jones

• Publisher: Taylor & Francis
• Year: 2020
• Print ISBN: 9780367497637
• eBook ISBN: 9781317285243
• Edition: 1
• Topic: Economics
• Subtopic: Ecology
• Index: Economics

This book presents a new System Dynamics model (the ERRE model), a novel stock and flow consistent global impact assessment model designed by the authors to address the financial risks emerging from the interaction between economic growth and environmental limits under the presence of shocks.

Building on the World3-03 Limits to Growth model, the ERRE links the financial system with the energy, agriculture and climate systems through the real economy, by means of feedback loops, time lags and non-linear rationally bounded decision making. Prices and their interaction with growth, inflation and interest rates are assumed to be the main driver of economic failure while reaching planetary limits. The model allows for the stress-testing of fat tail extreme risk scenarios, such as climate shocks, energy transition, monetary policies and carbon taxes. Risks are addressed via scenario analyses, compared to real available data, and assessed in terms of the economic theory that lies behind. The book outlines the case for a government led system change within this decade, where the market alone cannot lead to sustainable prosperity.

This book will be of great interest to scholars of climate change, behavioural, ecological and evolutionary economics, green finance, and sustainable development.

Part I

World models and limits

1 The first formal world models

DOI: 10.4324/9781315643182-2

“What we meant in 1972 in ‘the Limits to Growth’ and what is still true, is that there is simply no endless growth in a finite planet” (Meadows 2012). The need for developing a world model was recognised and actively encouraged by the Club of Rome (CoR) in 1970 (Club of Rome 1970). The CoR is an informal, multinational, non-political group of scientists, intellectuals, educators, and business leaders sharing a common vision and concern for the future of humanity. It was formed in 1968 at the instigation of Aurelio Peccei, an Italian anti-fascist industrialist (Pauli 1987; Meadows et al. 1972). With the aim of engaging in the social problems generated by humankind and finding a way to create an economic paradigm that could generate sufficiency for all in the indefinite long term, they gained global visibility after their first report entitled ‘The Limits to Growth’ was published in 1972 (Meadows et al. 1972).

After decades of prosperous global industrial and business activities and an unprecedented accumulation and spread of capital and technology worldwide, it became clear that such an orthodox approach was also causing problems that would require a different way of thinking from that used to generate such ‘prosperity.’ They named such a concept the ‘problematique of mankind’ and referred to it as the “fragmentation of reality into closed and well-bounded problems which creates a new problems whose solution is clearly beyond the scope and the concepts we customarily employ” (Club of Rome 1970, p. 13). Today, the CoR has its headquarter in Winterthur, Switzerland, and involves more than 100 members ranging from heads of state, UN bureaucrats, high-level politicians and government officials, diplomats, scientists, economist and business leaders around the globe. They all share a common mission: “to act as a global catalyst for change through the identification and analysis of the crucial problems facing humanity and the communication of such problems to the most important public and private decision makers as well as the general public” (Weizsäcker 2014).

The first world computer model was driven by the need for a unifying integrated vision that could be shared among collaborating countries and economies that were getting bigger, more complex, more intelligent, at faster increasing rates, but were still based on resources extraction, unable to cope with (probably being the cause of) social and environmental problems, including overpopulation, widespread poverty and malnutrition, loss of traditional values in the society, and the rise of pollution. The need generated a research demand which, accompanied by the rise in cybernetic technologies previously applied to the study of social and industrial complexity, allowed for the feasibility of such an ambitious and unprecedented project (Club of Rome 1970).

Following the development of a research proposal in March 1970, the group asked Professor Jay Forrester at the Sloan School of Management at the Massachusetts Institute of Technology (MIT) to assess the potential of industrial dynamics (thereafter named system dynamics) (Forrester 1961, 1968, 1971a) as a possible methodology to approach the problematique. On 29th June 1970, Forrester was invited to the conference of the Club of Rome in Bern. After an introduction to the problematique, Forrester generated a sketch of a world model (sometimes called World1) while on his flight back to the US. On 20th July, the Club of Rome was invited to a two-week conference at MIT, to review the World2 model, the first functioning formal computer world model ever developed (Forrester 1971b; Meadows et al. 1982).

Phase One of the Predicament of Mankind could formally start. Dennis Meadows, who had recently attained his PhD at MIT under Forrester’s supervision, was appointed as team lead for the development of the World3 model. Based on the initial work of Professor Forrester, a team of 16 scientists, with active support from the Club of Rome members, was engaged for 18 months to answer the complex interconnected set of needs of the Club of Rome and its stakeholders using SD. In March 1972 the research was presented to the Club of Rome committee, and the first report of the Club of Rome entitled “The Limits to Growth” (1972) was published to the wider public.

Limits to growth achievements

The main findings of the Limits to Growth were sobering. By means of scenario analysis through simulation, the team at MIT opened a discussion proposing social and economic shifts away from the most basic paradigm that governed global society dynamics till then, i.e. the paradigm of growth.

The belief that economic growth based on resource extraction and use could have been the engine for spreading well-being across societies and cultures for an indefinite time horizon was demonstrated as being naïve in nature and was even the driver of widespread problems generated by the interaction between growth and the ecological physical constraints of the planet (limits). Population and industrial growth could overshoot the planet’s limits within the first half of the 21st century with a possible drastic collapse of human society in terms of well-being including the early deaths of a significant portion of the population on the planet.

Large uncertainty in estimating structural relations and limits were considered in the publication. In particular, scenarios relaxing the effects of growth on the use and depletion of natural resources were proposed. Unless the effects could be reduced to zero the dynamics of growth could still reach the limits of the planet within the time frame of the simulation. Most important, Limits to Growth (LtG) recognised the importance of delays in the adaptation of humankind to develop and spread new technologies globally. The emphasis on time delays showed that the earlier actions are taken to address the limits, the better the outcome could have been for all.

On the basis of such findings, the team of scientists tried to reach multiple aims. First, to answer the needs of the Club of Rome and the Problematique. Second, to provide the scientific community with a model of the world that could be criticised, improved, and updated as well as to form the basis for further research. Third, to communicate the results of the work to everyone potentially interested in its findings, that is, the whole world population from then onwards.

According to Meadows et al. (1982), the work was very successful in all three aspects. By the year 1980, the LtG was translated in 23 languages and sold over three million copies worldwide; it accounts for more than 12 million copies sold to date (Jackson 2016). Seven months after the LtG publication, the representatives of 12 national scientific organisations met in London to affix their signatures to the charter of a new and unique international scientific organisation: the International Institute for Applied System Analysis (IIASA). Concerned with the findings of the LtG, IIASA opened a call for global models to different scientific communities as a series of symposiums. The aim was to run a careful comparison between models that were developed based on paradigms different from the one of system dynamics (SD). Having multiple perspectives on the state of the future of humankind may potentially generate a unifying vision to drive actions. Such a symposium is recognised as one of the most intense efforts up to that point in global modelling (Sterman 1991).

In addition to the World3 Forrester-Meadows model, another six models were included in the comparative analysis. Although World3 was considered as having answered the needs of the Club of Rome, new directions were highlighted and new initiatives were taken. Among those models we find the Mesarovic-Pestel model that is a follow up on the LtG from the Club of Rome, and also formed the basis for the second report to the Club of Rome (Mesarovic and Pestel 1974).

With the publication of the Dynamics of Growth in a Finite World (Meadows et al. 1974), World3 became one of the most fully documented among the global models (Meadows et al. 1982) at that time. World3 is also probably one of the most criticised models of all time. In the words of Donella Meadows, “those who believed that continued growth was ...

Table of contents

• Cover
• Half Title Page
• Title Page
• Copyright Page
• Dedication Page
• Contents
• List of figures
• List of tables
• List of equations
• Acknowledgements
• Foreword
• Preface
• Part I World models and limits
• Part II Economic Risk, Resources and Environment (ERRE) model
• Index