The Economic Consequences Of BREXIT:
A Challenge for the System Dynamics Community
The advent of Brexit will cause a shock to the economy which many commentators believe will be the most profound for a generation, possibly even since the Second World War. Anticipating what might transpire, without the aid of a modelling tool, seems slim. System Dynamics is well-known as a methodology for projecting dynamic behaviour in a complex system and so the challenge of modelling the economic effects of Brexit over the next ten years or so is one which the SD community should respond to. Below is an outline of such a ‘challenge’: can the SD community respond and contribute to this endeavour in strategic economic planning?
Although the financial crisis in 2008 took almost all economists by surprise, in the Brexit case we don’t have to attempt to foresee the event itself but we do need to consider the economic consequences. If the dynamics inherent to this economic shock can be modelled then the government and the Bank of England will know which trends to monitor closely and they will be placed on a footing to respond proactively rather than reactively.
This task should not be regarded as a competition but as a challenge which illustrates the utility of SD for economic modelling
THE DETAILS OF THE CHALLENGE
• Prepare and document an SD model projecting the consequences of Brexit on the UK economy; the team can consist of any number of persons
• Likely horizon is 10 years (2018-2028); model would depict the main economic variables such as GDP; inflation; interest rates; unemployment; government debt; consumer spending etc. Model can embrace fewer or more of these macro variables. It can be set at industry level, designed to address the consequences on a specific industry, if preferred.
• We have 2017 data to examine the immediate effects; most important here is the fall in the £
• Models to encompass a maximum of ~100 variables (rates; levels; aux). Parameters are extra
• Can use any SD (or indeed wider) modelling software which produces graphs covering the next 10 years
• Can submit up to TWO models (to cover any dilemmas you may have)
• Make your submission to the President of the UK Chapter, ideally by March 31st 2018.
What is System Dynamics, and Why should I Care?
What do climate change, social systems, businesses and bathtubs all have in common?
They are all interacting systems of people and entities from the natural and man-made world. System dynamics is concerned with understanding how these systems really work: what drives them and causes the behaviour we see? What can we do to improve these systems? And what must we not do, to avoid making them worse?
Many apparently different social and physical systems have similar underlying structures and can be described using the same simple ideas. System Dynamics provides the tools to analyse the way such systems work – tools ranging from simple, effective diagrams through to full scale computer simulations capable of replicating the behaviour of the most complex system – all designed to help us understand why systems behave the way they do, and what is likely to happen if we make changes to them.
So what is a system?
According to Collins Dictionary, a system is “the manner in which the parts of something fit or function together”. System Dynamics is concerned with how that collection of parts operates as a whole, over time.
For example, businesses are classic systems. They consist of stocks and flows of people, money, information, physical goods and materials all interacting together and in constant flux over time. The people in the business make decisions based on information about the world around them, and as they make those decisions – to order more goods, hire more staff, invest more capital – they change how the business performs and interacts with its environment.
This, in turn, changes the decisions they and their colleagues or rivals make in the future, resulting in feedback. Feedback occurs in many real world situations, and often causes complex behaviour that is hard to understand. It is also one of the central concepts System Dynamics is designed to tackle.
Good practical System Dynamics work begins with expert knowledge of whatever is being studied: we cannot understand a business as a system unless we know how it operates; we cannot understand the climate system without knowing about the physics and chemistry of the atmosphere; we cannot understand the credit crunch of 2008 as a system without knowing how the international banking system operates.
Often this expertise is concentrated in groups with detailed knowledge of just parts of the whole system. People might be experts on particular aspects of businesses, of the climate or of the international finance system. The ‘value added’ of System Dynamics is to take those parts and show what happens when they are put together in a whole dynamic system.
It’s classic big picture stuff.
How do I know I need System Dynamics?
System Dynamics can help anyone who needs to understand why important factors in the world around them change over time in the way they do, and what to do to improve them. For example:
In business – what drives growth of sales and profits, staff turnover or customer satisfaction?
In environmental issues – why do levels of fish stocks or greenhouse gas levels change and what can we do to halt or reverse those changes?
In public policy – how can we control levels of crime, shortages of nurses or teachers or the eradication of disease?
Sometimes the behaviour is more complex – maybe as the situation features cyclicality, boom-and-bust, and vicious cycles of decline, and you want to know why, and what to do about it.
Or maybe you are designing a new system that does not yet exist, and need to know how to design it so that it performs as you want.
Or maybe you have a system that is already working but you need to make changes to improve it and wonder what the result will be.
If this sounds like you, System Dynamics can help.
What can I expect?
The approach can be used at varying levels, from very short ‘white-board’ analyses of simple issues up to large and complex simulation models of extensive challenges covering many different but inter-related topics.
System Dynamics projects will begin with a knowledge gathering stage, in which you will be closely involved. One of the first things to be created will be a clear and accurate diagram showing the system you are working on and its behaviour. This is very similar to the kinds of ‘control panels’ you see in pictures of the control rooms for chemical plants, or rail or power networks. It shows where ‘stuff’ is – people, products, cash etc – how it is moving around and growing or leaking away, and where your ‘controls’ are affecting these changes.
Sometimes these diagrams are enough – you can learn from them, and explain to your colleagues, exactly why thing behave as they do. But complex or high-value situations often justify the construction of a computer model of your system, using the knowledge you and your colleagues possess. This is a highly skilled activity that should be done by well-trained people who really know what they are doing. The model they build with you will be put through rigorous tests, which you will be asked to take part in, to make sure that it really is a good model of your problem.
Once the model is working you can begin to use it. It becomes a laboratory in which to experiment and learn so that you can understand why things behave the way they do, and find ways of improving them. The software used by System Dynamics modellers will help you do this by animating your system diagram with flows of numbers, tracing causes and effects, or automatically running hundreds or even thousands of simulations to test wide ranges of policy options. The most modern software will even seek out the optimal policy options for you, the ones that deliver the best results.
It sounds like spreadsheet modelling to me.
It isn’t. Spreadsheets are ingenious and flexible tools, but they are not suited to simulation of dynamic systems.
Why not? Because spreadsheets are not designed to handle complex interactions among many factors, with dynamic feedbacks, over time. They also cannot display in any understandable way a system diagram of how things work. In very simple cases spreadsheets can be ‘cludged’ to do system-dynamic-like analysis, but the tools and methods of System Dynamics are designed for the job and have been steadily honed over the last forty years. They will always be more efficient, effective, and valid.
Does it work?
System dynamics can deliver a very high return on investment – a ‘return’ in the form of profit growth or other performance improvements, on the ‘investment’ of money and time. In business cases, results worth millions of pounds can result from just a few thousand pounds of effort, and in public policy and other non-profit cases, major improvements can be achieved with basic adjustment, or even a reduction, in how people and money are used. Click here for success stories.
To find out more about system dynamics see the about system dynamics page.