Adding Feedbacks and Non-Linearity to the Neoclassical Growth Model: A New Realm for System Dynamics Applications

Abstract

Modelling of economic systems is traditionally associated with a mathematical formalism that has its drawbacks and limitations. This study applies system dynamics as a specific modelling technique that enables us to modify and elaborate existing economic models and improve them both from a theoretical perspective and for practical applications. More specifically, the Solow-Swan growth model is enriched by feedback and non-linearity based on its extension by the energy sector. The influence and role of renewable resources are considered in this enhancement. The developed model is tested in two different scenarios and utilizes sensitivity analysis as the primary tool. Acquired outcomes offer a new perspective on the economy-energy nexus based on real data and demonstrate that system dynamics can be successfully used as a modelling tool even in the theoretical economics as a traditional discipline.

Energy Transition Scenarios and Their Economic Impacts in the Extended Neoclassical Model of Economic Growth

“…These findings are then used in the next step, which comprise the selection of a representative model of economic development, its conversion into the system dynamics format, and its extension with the energy sector, comprised of selected important feedback and stocks, to represent the ongoing energy transition. Detailed description of the method used for the EENGM development is the main subject of our previous work, presented in the article Adding Feedbacks and Non-Linearity to the Neoclassical Growth Model: A New Realm for System Dynamics Applications [22]. The energy transition currently only mildly influences economic growth, but has the potential to play a decisive role in the future.…”

“…The rationale for using the system dynamics method for constructing the EENGM has already been explained by Ref. [22]. Eight of the most relevant feedback structure models [3,15,17,18,[40][41][42] are chronologically ordered and listed in Appendix A-Feedback structure models.…”

“…Subscript t denotes the explicit time-dependence of the model, which is computed in discrete time steps where each simulation year represents one time step of the model. Structure of the model, basic behaviour, model equations, or model-simplifying assumptions, can be found in Section 2.4 and our previous work [22].…”

Macroeconomic modelling under energy constraints: Global low carbon transition scenarios

“…As stated before, system dynamics (SD) proves to be an adequate methodology for capturing these relationships, but it is also a relevant tool for economic analysis (Radzicki and Tauheed, 2009). Although it has typically been used by heterodox economists (Radzicki, 2009), it has recently even been extended to neoclassical models (Režný and Bureš, 2018). However, due to its features and functionalities, not assuming an a priori equilibrium, this technique has been much more attractive to the heterodox economists than to the neoclassical economists (Victor and Rosenbluth, 2007;Briens, 2015;Bernardo and D'Alessandro, 2016;Cordier et al, 2017).…”

“…Nevertheless, prices are still implicit in the model, embedded in the deflated monetary values (see section 3.1.3). Although scholars are increasingly coping with energy limits, only slight absolute or relative decreases in economic output are being reported (Kiuila, 2018;Režný and Bureš, 2018). Furthermore, these models and others might be overestimating the economy's capacity to keep growing under energy constraints.…”