Precautions for modeling

I believe that system dynamics, and more specifically stock and flow diagrams, can provide a powerful tool in describing and understanding the principles and theories of economics. But, that belief comes with an important word of caution.

Validate Your Assumptions

You might think of system dynamics models as highly complex, deductive statements. The discipline of deduction tells us that true premises combined with valid logic can only lead us to true conclusions. Similarly, system dynamics models that incorporate true premises in their underlying assumptions and incorporate the rigor of valid logic will give us true conclusions. As with other forms of deduction, however, if the model begins with false premises or the construction of the model uses flawed logic, the model will reach a false conclusion.

We have to exercise a great deal of care when building system dynamics models to assure the accuracy of our premises and the validity of our argument. This becomes especially important in modeling economic theory because of the prevalence of flawed theory in the realm of economic study.

Know the Modeling Limits

The second caution comes in knowing the limits of the systems model. Because of the extreme complexity and adaptive nature (learning ability) of economic systems, we cannot build an accurate model of an economic system of significant size. The most we can hope to accomplish, therefore, consists of depicting economic principles and theories.

The models presented here, therefore, do not pretend to represent real systems. They represent, instead, theories that describe the behaviors of real systems.

Our Objectives

We have three objectives in presenting this model of a simple economic system:

1. To introduce system dynamics and stock and flow modeling as a tool for understanding economic principles and theories.
2. To introduce Insight Maker as an online stock and flow modeling tool, which we intend to use in other descriptions of economics theories.
3. To present some fundamental and generalized principles applicable to understanding more advanced economic concepts.

Now, let's proceed to the description of the development of the model in the Next tab (above)...

Development of A Model of A Simple Economy

Since visitors to this site have varying degrees of understanding of system dynamics and economics, we want to first go through the process of developing a model of a simple economy. We will walk you through the following five steps:

Step 1: Multiple Stocks and Flows

In the first step we present the concept of stocks and flows with multiple diagrams, which indicates the potential complexity of an economic model.

Step 2: Transition to a Generalized Model

In the second step we provide a description of the manner in which we deal with the problem of representing the large number of elements in a highly complex economic system.

Step 3: A Consolidated Model

In the third step we use the strategy of moving to a higher level of abstraction, described in step 2, to create a consolidated model.

Step 4: Adding Variables & Links

After consolidating what could amount to a multitude of stocks and flows into a single stock and flow diagram represented by units of a higher level of abstraction, we add some variables and links to make the model more meaningful.

Step 5: The Complete Model

In the fifth step of our model development we add a few more variables and links in order to finalize a simple and complete model of an economy.