Many years ago I started my education at The UWI in economics. The book of choice was Samuelson which my instructors followed to the letter.
I was introduced to the relationships among supply, demand and prices for a product, to the traditional factors of production (land, labour and capital), to investment, profit, income etc, all of which were delivered as separate topics in a very disjointed way, as the chapters in the book. Then one day the topic introduced was so obtuse that in desperation I turned to a colleague, a PhD in control system engineering, to at least help me understand what Samuelson and my lecturer were trying to say. He had done a course in his final year of the BSc Engineering in Engineering Economics so he was not an absolute stranger to the terms in my instruction.
He looked at my notes and at Samuelson and said to me that my book and instructors were all correct in defining the static relationships (they were indeed dynamic) among selected economic variables but they were all missing the point that like, say, a petrochemical plant that produces urea, economics is a system which encompasses all of what I was being taught, but the system that imposes a structure on the variables (supply, demand, finance etc.) was being ignored. Then I got my first lesson in systems theory.
Economics was complex because it interacted with other economic and social systems, was Dynamic because its variables were time varying (not static), Adaptive because under changed circumstances—developments in technology, innovation—its structure can change. The structure of the system gives a set of independent variables, called System State-Variables (economic indicators), which are time varying but at any time define the complete state of the economy. These State-Variables are driven by the Input Variables to the system and the inter-relationships among these variables. The Economic performance measures are really weighted combinations of the state and input variables that economists and policy makers, choose to monitor. Hence chosen performance measures can be forced to their desired and reachable values by optimum choice and control of the inputs.
The next step in the economic model then is to choose the inputs, state-variables and even some of the economic performance measures of interest. One model defines these as: Inputs—private and public sector investments, foreign exchange income, private bank credit, current savings and Central Bank credit; State-Variables—gross domestic product (GDP), aggregate supply capacity (employment, plant etc.), public sector debt, foreign debt, money supply, national reserves; Economic Performance Measures—examples are GDP, employment, debt/GDP, ratio of aggregate supply capacity to investment, etc. It has to be emphasised here that the state of the economy is defined by the complete set of the state variables and not by any one or subset of them.
Further, economists and policy makers try to blend some of these variables together with even those from other systems so as to form a single measure which they may define as a “best” measure of the economy’s performance. We hear of the happiness index, human development index, the World Economic Forum’s “Inclusive Development Index”, which is a weighted function of the state variable, GDP, and other variables from social models (median household income, poverty, wealth and income inequality, life expectancy etc.), whatever.
The single state-variable, GDP, (consumption+ investment+ government spending+ exports-imports) as a performance measure is also very popular but is has its obvious limitations; it says nothing about, for example, debt in the economy, employment etc. But as a fundamental contributor to the state of the economy and other indices its value is in no doubt. Hence calls for it to be disregarded as a phony number are ill informed, particularly of economic system theory; the same applies to the debt/GDP ratio (the time it would take to repay debt if all activity in the economy were geared to this). Hence, when the Minister of Finance of T&T, Moody’s and to a lesser extent S&P tell us that the GDP is expected to grow over the next two years, the Finance Minister’s economic turnaround is really restricted to an increase in financial activity in the economy due to government spending, exports and even foreign investment in the energy sector. It tells us nothing about debt, national reserves, employment and the other state-variables.
Lastly, the economic system is adaptive as Schumpeter recognised these many years ago when he told us that via knowledge, innovation some firms will die, others will take their places with new/improved products and services. What this is saying is that the structure of the economy will change, it will adapt to the new circumstances driven by technology/innovation or whatever that may impact on it. For example, we are now experiencing the fundamental impact that the digital and telecommunications technologies are having on the global value chains. Hence, exogenous inputs, outputs from other systems, education, R&D and the like can influence the performance of the economy.