Technology Long Waves

  

The Kondratiev Wave is an important element of World-Systems Theory. The graphic above is taken from Andreas Goldschmidt and gives historical specifics for technological cycles. Goldschmidt's formulation allows for the idea to be tested (one of the models I always test), is partially consistent with economic Growth theory (particularly if we do not assume a functional form for exogenous disembodied technological change in the Solow-Swan Model) and I can present some examples.

• The Iranian Economy prior to 1979 and associated Tech Bubble.

Again: Why Macroeconomic Models have Failed!

Almost two decades after the Financial Crisis of 2008, economists are still puzzling over why they failed to predict the Financial Crisis and what the failure of predictions has to do with the underlying economic models. The answer is simple but the solution, needless to say, isn't.

Economic Models are unable to predict systemic crises because they do not look at the Economy as a system but rather as a collection of individuals.

The System, as opposed to the individual participants, has its own rules and the rules have very little, if anything, to do with the rational economic behavior of individuals, even if all participants in the system behave rationally, which they certainly don't! The System can still produce optimum solutions, but that is also basically hypothetical.

All of this has been argued before (see the references in the Notes below), but we aren't making progress because we don't have examples of economic system models that can be estimated from historical data. I will provide examples in this post.

Researchers in Biology, Earth Sciences, and Engineering have basically solved the "Systems Problem," but the Social Sciences are still struggling with qualitative mental models that, even in mathematical versions, cannot be tested and refuted. There are great examples in Sociology (Parsonian Systems Theory), Political Science (Easton's Political Systems Model) and Economics (Classical Economic Models). 

Notes

 

How Does Systems Theory Differ from Economics?

 

 

The DCM is implemented in the public domain R Programming language as an extension to the dse (Dynamic System Estimation) package. The dse package can be downloaded on all Computer platforms and can be run on line with a web browser (here). The DCM extensions with documentation are available here.

In the dse package, a state space model can be created using the SS command in R:

The State Space model has two forms: non-innovations and innovations:

The matrices are (double click to enlarge):

An example of the USL20 model can be found here. Other examples of the models with written analysis can be found on my blog at Blogger.com (here). For more information on Dynamic Component Models see Pasdirtz, 2007.

Controlling Dynamic Components Models

 

For more information on Dynamic Component Models see Pasdirtz, 2007.

Feedback Controllers in the World-System: II

 

Feedback Controllers are used in Control Theory to generate positive and negative feedback loops to control systems. In economics and sociology, controllers can be generalized to describe the behavior of macro-economic and macro-social systems starting with Leibenstein's Malthusian Model:

• Malthusian Controller (Q-N) Negative feedback will result when population growth exceeds economic growth.
• Stock Adjustment (Q-K)
• Liberal Market Controller (Q-P) 
• Marxist Controller (Q-L) or (Q-wL) 
• Labor Surplus Controller (Q-LA) 
• Keynesian Controller (Q-G) 
• Environmental Controller (Q-T) 
• Mercantilism Controller (Q-X)
• Modernization Controller (N-V)
• World Price Controller (XR-X)
• Monetarism Controller  (Q-M)
• Fascism Controller (Q-War)
• Globalization Controller (WS-QP)
• Malthusian Trade Controller (N-X)
• Liberal Trade Controller (Q-X)
• Labor Surplus Controller (X-L)
• Class Struggle Controller (L-U)
• Urban Trade Controller (X-U)
• World-System Controller (WS-X)
• Ricardian Trade Controller (X-XWS)

In specific countries during specific historical periods, combinations of controllers are likely to be used. The used of a controller or multiple controllers does not imply that the systems is under stable control. For more discussion, see Growth and Control in the World-System. You can run the US_M model code and experiment with the model (here).

Feedback Controllers in the World-System: I

 

Taking a systems perspective on societal development involves (1) finding measurable variables of interest for the system and (2) categorizing them using the graphic above. Input variables are external to the system, for example the economic growth of another country or of the World System. Output variables are those under control of the system. The Environment captures the qualitative factors that might influence the performance of the system during a specific historical period. Feedback Control involves (1) the dynamic interactions of the state variables over time and (2) a feedback control loop (for example a PID Controller) imposed on a system to produce desired outputs.

Needless to say, for a macro-economic system, input and output variables could involve an infinite number of measurements. State Variables are the independent set of variables that explain the time path of the system outputs in response to inputs. In Dynamic Component Models, approximate state variables are constructed using Principle Components Analysis. Weightings and signs of indicator variables are used to construct the Measurement Matrix which converts state variables to output variables.

The measurement matrix for the US_M Model (1900-2000) shows a number of controllers. Each row of the matrix is a state variable. The first state variable describes Overall Balanced Growth. The second state variable, US2=(0.663X - 0.555N) describes a Malthusian Export Controller. The third state variable describes a combination of controllers: Malthusian = (0.484 Q - 0.421 N),  Export Prices = (0.33 XREAL - 0.538 X) and Employment = (0.3458 HOURS - 0.268 L). Together, these three state variables explain 0.999% of the variation in the growth indicators.

The time plots for the US1, US2 and US3 state variables are presented above. US1 is the growth component that shows an exponential path across the Long 20th Century. US2 (dashed red line) the Malthusian Export Controller turns negative in the period after 1960. And, US3, the complex Malthusian, Export-Price and Employment controller stays close to the zero point throughout the period.

The three short-cycle minor controllers, US4= (0.650 Q- 0.504 L), (US5=(0.7362 HOURS- 0.490 L)) and (US6=another complex controller), show cyclical paths with decade-long periods.

World-System (1300-1450): The German Economy

 

One of the most important points to understand about Germany is that until 1871 Unification, Germany was a collection states and part of the Holy Roman Empire. Cities were connected by crude trading routes and the size of the cities was limited by the difficulties of long term trade. Urbanization (DE3=(U-N) above) was a strong limiting factor in economic development for the period prior to 1450 (see the graphic above). Growth did not begin accelerating until 1409. And the period prior to 1409 was a long-developing Malthusian Crisis (U-N) that limited expansion.

The period from 1300-1400 is sometimes called the Crisis of the Middle Ages: demographic collapse, political instability and religious upheaval. The Great Famine of 1315–1317 and the Black Death of 1347–1351 potentially reduced the European population by half or more as the Medieval Warm Period came to a close and the first century of the Little Ice Age began and unity of the Catholic Church was threatened by the Western Schism. In Germany between 1336 and 1525 there was widespread and militant peasant unrest.   Both the Urbanization ECC and the Malthusian ECC worked together to limit growth up to 1409. 

Economically, the period after 1300 in the graphic above was dominated by the  Hanseatic League which declined after 1450. Hanseatic trade involved both maritime, in-land waterway and overland trade.

State Space Models for the period (1300-1450) can be found here.  A discussion of the period after 1450 can be found here.

Notes

The measurement matrix for the state space model is presented above. DE1=(Growth), DE2=(Q-N-U) and DE3=(U-N), that is Growth, the Urban-Malthusian Controller and the Urbanization Controller (A discussion of Error Correcting Controllers, ECCs, can be found here).