World System (1950-2000+): The UK Economy

 

Displayed above is the UKL20 Measurement Model constructed using Principal Components Analysis (PCA). The code names are:

UK1 explains 53.4% of the variation, UK1 + UK2 explain 88% of the variation and UK1 + UK2 + UK3 explain 93% of the variation in the indicators. The indicators are taken from the Kaya Identity:

Where N = Population, L =Labor, LU = Unemployment, Q = Production, E = Energy Use and CO2 = Carbon Emissions. The lower case letters are coefficients in a causal model.

The Kaya Identity works well for short-term predictions but in the long run, there are feedback effects between the extensive variables (N, L, LU, Q, E, CO2). Here is where the Measurement Matrix becomes important. 

The negative coefficients UK1=(-0.324 LU - 0.319 CO2) indicate negative feedback effects on the first historical state variable controller. In a standard direct graph, the negative feedback effects might involve the Labor Force, L, and population, N. In the DCM model, the effects are on overall growth which is harder to represent in directed graphs. This is why I analyze the dynamics of the state variables (UK1, UK2 and UK3) rather than the individual indicators (see the UKL20 System Matrix below).

The UK2 = (0.6356 EF + 0.392 CO2 + 0.558 E - 0.321 L) balances the Ecological Footprint (EF), Carbon Emissions (CO2) and Energy Use (E) against the Labor Force (L)

The digraph above is a little easier to understand and the feedback effects are clearer.

Finally, the UK3 = (0.712 LU + 0.417 L + 0.3814 N + 0.2818 EF - 0.2818 KOF)

is a KOF Globalization controller. Notice that the UK1 and UK2 feedback controllers are unstable (see the System Matrix below and Unstable Feedback Loops).

Notes

Neoclassical economists might argue that adding markets for Labor, Production, Energy Use and Emissions are all that is needed. Unfortunately, Markets Won't Save Us.

 

UKL20 BAU System Matrix

If the UKL20 BAU model was represented as a direct graph, it would be:

which is not very insightful but shows all the possible connections between state variables.

It is more insightful, when analyzing interactions between state variables, to use Shock Decomposition Diagrams and Impulse Response Analysis (see the UKL20 BAU model). Notice that the feedback effects are very small.

The time plots of UK1 (solid line), UK2 (dashed red line) and UK3 (dotted green line) are displayed above.