World-System (1950-2000) How Does the Russian Economy Work?

 

From Google AI:

World-System (1950-2000) How Does the Economy of Switzerland Work?

The United States recently imposed punishing tariffs on Switzerland. To understand how a trade war might affect the Economy of Switzerland we need to understand how the economy works. Socio-technical systems are complex systems that, in spite of claims to the contrary, no one can understand fully. What we can understand are mathematical models and I have one (a state space statistical model),  the CH_LM model (see the Boiler Plate for a more detailed description of the models).

Not surprisingly, the bottom line is that the Swiss economy is an Export Controlled economy. Tariffs will trigger long-term adjustments to economic growth. What follows is a detailed explanation.

There are two important components to a Dynamic State Space Model: the Measurement Matrix and the Systems matrix. The Measurement Matrix (below) shows how the indicator variables are weighted in the state space, that is, how the state space is defined.

The five indicators variables are Q (Aggregate Production), N (Population), U (Urbanization), XREAL (Real Exports), X (Nominal Exports) and L (Labor). The first component, CH1, is overall growth (the variables are all similarly weighted). The second component, (CH2), is a historical feedback controller for (X-HOURS)--exports and employment have to stay in balance. Finally, the third component, (CH3), monitors the relationship between Urbanization and Export Employment. Together they explain approximately 100% of the variation in the indicators!

The time path of the three state variables is presented above. CH1 seem to be reaching a steady state after 2000. CH2 = (X-HOURS) reaches a low point (X < HOURS) around 1975. And, CH3 = (U-HOURS-X) reaches a low point (high Urban Export Employment) around 1995.

The important point to understand about the historical controllers (CH2 and CH3) is that they control the economy over decades, not from year to year, as in conventional economic models where price changes have relatively immediate effects.

The interaction between growth and the historical controllers is determined by the System Matrix, below.

Notice that one of the diagonal coefficients of F is greater than 1.0, meaning that CH2 = (X-HOURS)  makes the system unstable. To understand the dynamics the model, we can look at a shock decomposition of the Systems matrix, below:

Let's just look at the growth-effects of a shock and the historical feedback effects of a shock to CH2 = (X-HOURS). The rows of the shock decomposition diagram show the effect of subjecting CH1 to a one standard deviation shock (row 1 above) and then (row 2) subjecting CH2 to a one standard deviation shock (both are large shocks to make effects clear). 

A shock to economic growth takes about 4 years to work it's way out of the system with the full shock not being felt by either CH2 or CH3 (CH3 peaks quickly and returns to equilibrium). A shock to the Export-Employment controller (second row) takes about 4 years to be corrected (middle graphic) and has a negative effect on CH1 and a negative effect on CH3 (which is over-corrected after about 7 years).

In other words, shocks such as the imposition of US Tariffs will have a multi-year effect on economic growth but will be met by historical feedback responses from the Export-employment controller and the Urban-Export-Employment controller. 

If you would like to experiment with the CH_LM model, you can run the BAU code here. You can experiment by stabilizing CH2 = (X-HOURS) to see what effect stability will have on the Shock Decomposition. You can also look at the effect of going on a Random Walk (RW) for new trading relationships. The problem with the Random Walk (RW) is that it might product a period of declining economic growth while new trading partners are found; a new attractor path must eventually be found in a matter of years.

The Business-as-Usual Scenario (BAU): Models vs. Reality

The Intergovernmental Panel on Climate Climate Change (IPCC)  started publishing Emission Scenarios in 1990s and almost immediately abandoned using a Business-as-Usual (BAU) scenario because it was thought to be misleading. BAU implied that nothing was being done but governments and industries were adopting some sort of Climate policies (even if they were just Greenwashing). What Business-as-Usual really meant was becoming murky.

With the Fifth Assessment Report (AR5) in 2014, the IPCC began using an handful of Representative Concentration Pathways (RCPs, see graphic above for RCP1--RCP5). Unfortunately, what happened is that the Worst-Case Scenario (RCP8.5) became the BAU scenario. In 2020, Hausfather and Peters wrote an article in Nature and on the Carbon Brief Blog arguing the Worst-Case or BAU scenarios were unlikely and interfered with policy development.

First, the IPCC tackled a really difficult (unsolvable?) problem (the Future is Unknowable) in a very intelligent way (maybe the only way) and I have used the approach extensively in all my economic and environmental projections (see the Boiler Plate). But, I haven't given up on the BAU Scenario because it can be defined precisely with Systems Theory (not that a precise definition will reduce confusion but at least I can try).

A BAU Model df = A dynamic system model without inputs.

In reality, it is very rare to find closed systems. Everything is related to everything.  This is why scientists construct experiments, to control (isolate) system inputs. When we are study socio-economic-environmental systems, we cannot conduct experiments; we cannot control system inputs. But, we can construct dynamic models and we can control the inputs of the models.

And, in my experience, the mental models of most policy makers involve BAU systems, systems without inputs. For example, when politicians impose protective tariffs (a favorite policy choice of the Trump II Administration in the US), they seem to uniformly forget that their country is embedded in a World-System where there will be second-round effects and retaliation. If the BAU model is the most likely mental model used by Policy Makers, it needs to be involved as a comparison for different (provably better, at least within the models) policy measures.

Systems Theory also helps here by helping define the Policy Space as filled with alternative systems, many of which will have inputs. Starting with the BAU model helps us define the other models.

Notes

From Google AI:

World-System (1950-2000) How Does the Syrian Economy Work?

 

Technological 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.

The Iranian Revolution

 

This documentary presents many of the historical issues surrounding the Iranian Revolution: The transition from Feudalism, Modernization, Westernization, Religious Reaction, Petrostate politics, the role of the US Government and the CIA activities in Iran, etc. Very much worth a watch.

Notes

Further reading:

• Iranian Revolution a series of events that culminated in the overthrow of the Pahlavi dynasty in 1979.

• Strait of Hormuz a strait between the Persian Gulf and the Gulf of Oman. It provides the only sea passage from the Persian Gulf to the open ocean and is one of the world's most strategically important choke points.

• Iran-Contra Affair a political scandal in the United States that centered on arms trafficking to Iran between 1981 and 1986, facilitated by senior officials of the Ronald Reagan administration

• Iran Nuclear Program one of the most scrutinized nuclear programs in the world, has sparked intense international concern.

• Pahlavi Iran the Iranian state under the rule of the Pahlavi dynasty. The Pahlavi dynasty was created in 1925 and lasted until 1979 when it was ousted as part of the Iranian Revolution, which ended the Iranian monarchy and established the Islamic Republic of Iran.

• Iran-Iraq War an armed conflict between Iran and Iraq that lasted from September 1980 to August 1988. Active hostilities began with the Iraqi invasion of Iran and lasted for nearly eight years, until the acceptance of United Nations Security Council Resolution 598 by both sides.

• Iranian Economy a mixed, centrally planned economy with a large public sector. It consists of hydrocarbon, agricultural and service sectors, in addition to manufacturing and financial services, with over 40 industries traded on the Tehran Stock Exchange.

• The White Revolution a far-reaching series of reforms to aggressively modernize the Imperial State of Iran launched on 26 January 1963 by the Shah, Mohammad Reza Pahlavi, and ended with his overthrow in 1979.

• Modernization Theory holds that as societies become more economically modernized, wealthier and more educated, their political institutions become increasingly liberal democratic and rationalist.

• Foreign Policy of the Kennedy Administration The United States foreign policy during the presidency of John F. Kennedy from 1961 to 1963 included diplomatic and military initiatives in Western Europe, Southeast Asia, and Latin America, all conducted amid considerable Cold War tensions with the Soviet Union and its satellite states in Eastern Europe.

Blog Roll:

• Stabilizing the Iranian Economy Easy but not easy!
  
• A Deep Dive into the Iranian State Space Cycles vs. Control.
  
• The Iranian Revolution Still being worked out today.
  
• Will Israel and US Attacks Hurt the World-System? Yes
  
• How Does the Iranian Economy Work? Not like a Neoclassical, free-market economy.
  
• What was the Impact of the Iranian Revolution? Elimination of Cycles!
• Iranian Globalization and Unemployment Created the discontent that led to the Iranian Revolution.

World-System (1950-2190) Stabilizing the Iranian Economy

 

In a previous post (here), I presented seven forecasts for Iran. The "best" forecast was a Business-As-Usual (BAU) forecast for infinite exponential growth into the future, a result that would probably please Iran's economic planners. It's also not realistic. The only thing that grows forever is cancer. At some point, Iran (and many other countries) will have to face the Steady-state Economy.

The graphic above shows a forecast for Iranian growth that reaches a steady state sometime after 2190. It involves a simple change to the IR_LM model. The growth parameter is simply changed from 1.01282761 to 0.98, a reduction of about 0.03%--slowing growth not economic stagnation.

Getting countries to reduce growth rates is not simple matter, as the IPCC has found when trying to control climate change. But, it is the same lesson demonstrated by the Limits to Growth models and System Theoretic considerations.

For Iran, Instability (unstable Systemic Growth) was created by the pressure to Modernize, both from the Pahlavi dynasty and from the Foreign Policy of the Kennedy Administration (Walt Rostow, one of Kennedy's Academic Brain Trust, was a strong advocate of "take-off into sustained growth" (the definition of historical instability in the Growth Component IR1) and a fundamental tenant of Modernization Theory

Notes

You can run the IR_LM model yourself (here). You can read an explanation of how the state space Dynamic Components Models (DCMs) are constructed in the Boiler Plate.

Your options for stabilizing the  IR_LM model are to (1) reduce growth rates and (2) increase feedback effects. Bootstrap confidence in intervals in the code will help you pick reasonable values for changes to the System Matrix F.

Further reading:

• Iranian Revolution a series of events that culminated in the overthrow of the Pahlavi dynasty in 1979.

• Strait of Hormuz a strait between the Persian Gulf and the Gulf of Oman. It provides the only sea passage from the Persian Gulf to the open ocean and is one of the world's most strategically important choke points.

• Iran-Contra Affair a political scandal in the United States that centered on arms trafficking to Iran between 1981 and 1986, facilitated by senior officials of the Ronald Reagan administration

• Iran Nuclear Program one of the most scrutinized nuclear programs in the world, has sparked intense international concern.

• Pahlavi Iran the Iranian state under the rule of the Pahlavi dynasty. The Pahlavi dynasty was created in 1925 and lasted until 1979 when it was ousted as part of the Iranian Revolution, which ended the Iranian monarchy and established the Islamic Republic of Iran.

• Iran-Iraq War an armed conflict between Iran and Iraq that lasted from September 1980 to August 1988. Active hostilities began with the Iraqi invasion of Iran and lasted for nearly eight years, until the acceptance of United Nations Security Council Resolution 598 by both sides.

• Iranian Economy a mixed, centrally planned economy with a large public sector. It consists of hydrocarbon, agricultural and service sectors, in addition to manufacturing and financial services, with over 40 industries traded on the Tehran Stock Exchange.

• The White Revolution a far-reaching series of reforms to aggressively modernize the Imperial State of Iran launched on 26 January 1963 by the Shah, Mohammad Reza Pahlavi, and ended with his overthrow in 1979.

• Modernization Theory holds that as societies become more economically modernized, wealthier and more educated, their political institutions become increasingly liberal democratic and rationalist.

• Foreign Policy of the Kennedy Administration The United States foreign policy during the presidency of John F. Kennedy from 1961 to 1963 included diplomatic and military initiatives in Western Europe, Southeast Asia, and Latin America, all conducted amid considerable Cold War tensions with the Soviet Union and its satellite states in Eastern Europe.

Blog Roll:

• Stabilizing the Iranian Economy Easy but not easy!
  
• A Deep Dive into the Iranian State Space Cycles vs. Control
  
• The Iranian Revolution Still being worked out today.
  
• Will Israel and US Attacks Hurt the World-System? Yes
  
• How Does the Iranian Economy Work? Not like a Neoclassical, free-market economy.
  
• What was the Impact of the Iranian Revolution? Elimination of Cycles!
• Iranian Globalization and Unemployment Created the discontent that led to the Iranian Revolution.

World-System (1450-1540) France, Spain or Go It Alone for England

 

This Sunday is the final Episode of Wolf Hall, Mirror and Light (preview above). Cromwell looses favor with Henry VIII and, unlike when your narcissist, egomaniac boss fires you, Thomas Cromwell is beheaded.  Interesting events in the last episode (here), especially in the Privy Council, set the stage for Cromwell's fall. The need for a Geopolitical Alliance with Germany (the Holy Roman Empire) fades as France and Spain reduce tensions. And, the Privy Council starts accusing Cromwell of trying to arrange an unnecessary and unpopular (with Henry) marriage with Anne of Cleves and divert blame from itself.

In Henry's lifetime (1491-1547), this seems to be the end of forging Geopolitical Alliance with marriage. His next wife, the young and adulterous Catherine Howard, was also beheaded in 1542 and his final wife, Catherine Parr, outlived Henry. Was anything lost by failing to form Geopolitical Alliance with continental countries? In a prior post (here) the forecast for alignment with Germany did not look economically promising. Possible economic alliances with France and Spain are presented above. France might have helped economic growth in England, but Spain would not have. In the end, during this period (1450-1540), England ends up going it alone after many lives were lost and the King's treasury quite depleted. 

My analysis of England's alliance failures in the Long Sixteenth Century leave open the question of why and whether the Balance of Power System failed. I will move on to that question in future posts. For the time being, you can run the ES_L16 model (here) and the FR_L16 model (here), in addition to other models for the Long Sixteenth Century here.

World-System (1450-1650): Anne of Cleves and the German Connection

 

This Sunday on PBS Wolf Hall, Thomas Cromwell finds a new wife for Henry VIII, Anne of Cleves. Anne is the sister of William of Cleves (William the Rich), a German Duke. Cromwell and Henry wanted a Geopolitical Alliance with Germany for Religious reasons. Henry had just split England from the Catholic Church, but still had conventional religious ideas--except for divorce and annulment. The Protestant Reformation was sweeping through Germany but was too radical for Henry (he had just had John Lambert burned at the stake in 1538 as a Protestant heretic). William of Cleves was a more moderate reformer and Henry needed alliances against Rome. The marriage with Anne of Cleves quickly failed for reasons that are unclear but explored in this episode Wolf Hall. My question is whether Germany would have been a good Geopolitical Alliance for England.

In the graphic above, I have presented alternative growth forecasts for Germany (1450-1640). The dark line is the actual data path and the remaining lines are for the Random Walk (RW), the Business as Usual (BAU) and the World System linkages (W).  All the forecasts are similar. After 1600, the Germany was heading for a steady state economy. As I have shown earlier, England would have better going it alone (BAU) or following the World System (here). In any event, alliance with Germany was a path not taken because Henry's marriage to Anne of Cleves quickly failed. Anne was smart enough to take a generous settlement from Henry and she managed to outlive both Henry and Cromwell.

You can explore alternative economic histories for Germany using the DE_L16 model (here) and consult the Boiler Plate (here) for more information about how the state space models were constructed. You can also read my discussion of the German Economy during this period here. And, you can imagine that, rather than Anne of Cleves looks being a factor, John Dee had gotten to Henry with the German growth forecast and convinced him that an alliance was not such a good idea. 

World-System 1540: John Dee makes a Growth Forecast for England

 

In a prior post (here), John Dee had given Henry VIII a forecast for World System growth. The forecast was not well received. "Who canst fathom a World System?" Henry mumbled as Master Thomas Cromwell led Dee out of the King's chambers, from where Dee returned to his library to divine his next steps. 

Henry had asked for something more specific, a forecast for England for example. Dee twirled his protractor, consulted the Angels and came up with the forecasts in the graphic above, unaccountably plagiarized from both my WL16 model and my UKL16 Model. Dee appropriated the original UK1 data (dark line above) and three forecasts: the Random Walk (RW, history is just one damned thing after another), the Business as Usual (BAU) model and a model using the World System state variables (W) as inputs.

Dee was a little nervous about the forecasts, so he presented them first to Cromwell. Cromwell was shocked; there was the World System forecast again (the one Henry did not understand) and now Dee had shown it to be far superior to the more reasonable BAU (England goes it alone) forecast. And having looked into the Future, Dee concluded that England would pursue the BAU path at least to the 1600s (if not to the present and here).

"Dr. Dee, you will have to present the forecast yourself to the King. I needst not be asked to render my opinion." History did not record the meeting between Henry VIII and Dr. Dee but Dee did not lose his head (Cromwell thought "...he will have his head loosed from his shoulders...") and managed to outlive both Henry and Cromwell (John Dee died in poverty and obscurity either in 1608 or 1609). History has recorded Dee's attempts to consult the Angels and explain Henry's failed marriages in terms of Geopolitical divinations. I will report those analyses in future posts. 

Season 2, Episode 2 of Wolf Hall aired last Sunday night and brought out some of the issues with the importance of marriages in forming Geopolitical Alliances and stabilizing the Balance of Power System. Henry VIII's daughter with Catherine of Aragon was Princess Mary Tudor (Lilit Lesser in Wolf Hall above). At the same time, Margaret Douglas, Countess of Lennox, was involved in a secret marriage that was not approved by the King. Princess Mary was Henry's link to the Habsburg Monarchy (Austria/Spain) and Margaret Douglas was Henry's link to Scotland which became part of the Kingdom of Great Britain in 1707 (more here). I will investigate all these Geopolitical Alliances in future posts.

Season 2, Episode 3 of Wolf Hall premiers this Sunday (April 6, 2025) and it begins Thomas Cromwell's fall from power. Not to be missed! You can stream Season2, Episode 3, Defiance or watch it over the air on Sunday.

Notes

More information about the World-System models can be found in the Boiler Plate.

What is a System?

 

In the past, I was not one who cared much for definitions. Now, I realize that the lack of clear definitions, particularly in the Social Sciences, has led to unnecessary misunderstanding. For example, in grade school, students learn that the Earth is a complex system with a number of spheres and feedback loops (see the graphic above--humans are located in the Biosphere). Then, students get to college and (might) learn in a Sociology course that there is (or maybe there isn't) a Capitalist World System. Or, they might read that the IPCC (Intergovernmental Panel on Climate Change) is having trouble identifying feedback loops in Human Systems. Then they might go back to Sociology (or Economics) and find that feedback loops are never discussed and that even the concept of a system is not taken very seriously.

Or a student might go to ChatGPT (here) and be given the definition above (with more text in the Notes below). At first, I had a problem with "components" and "work together to achieve a specific goal or function." Does the Earth System have a goal? Does it have components such as gear shifts (cars) or central processing units (computers)? Then I realized that the "component" parts of the definition are imposed on physical systems (which may or may not have them) so that we humans can better understand what we are talking about.

In the Earth System, the Atmosphere, Cryosphere, Hydrosphere and Lithosphere work together to support the Biosphere (Human, plant, animal life and consciousness--see Gaia philosophy). In my experience, critics have a field day with Systems Theory when it gets too speculative (e.g., Parsonian Systems Theory) and when definitions remain murky (particularly operational definitions, that is, measurement).

Just to make the discussion somewhat more concrete, does the graphic above (the Kaya Identity used by the IPCC) describe a system (where N=Population, Q=Output, E=Energy, CO2=Carbon Emissions and T = Global Temperature)? The extensive variables (N, Q, E, CO2 and T) are causally connected. The Impact (I=PAT) is described by the intensive variables (q=Q/N, e=E/Q, c=CO2/E and t=T/CO2).

As a conceptual system, the Kaya Identity is clear about the components, the interconnections, the purpose (explain climate change), the boundary (anything other than the extensive variables is out of the system) and inputs-outputs (N -> T).  It is only missing "feedback" mechanisms which, evidently, are optional. As a physical system, we know that all sorts of extensive and intensive variables are missing. Let's look at two well-known conceptual systems, the Malthusian Model and the Capitalist model to fill in some gaps.

The Malthusian system model (and here) is widely and deliberately misunderstood for all sorts of political reasons but the model (above) is simple, straightforward and unavoidable when trying to understand population growth and control. Population grows when there is an excess of Births over Deaths (b-d). Production (Q) does not necessarily keep pace with population growth (there is no technological change in the model--I'll add that next) and the difference, ECC=(Q-N), is the Error Correcting Controller (if you want to see specific examples of appropriately weighted ECCs, see the WL16 model). When population growth exceeds economic growth, it is a signal for population to decrease (or production to increase, if that is possible). The model is particularly appropriate for Peripheral Countries and for time periods before the Industrial Revolution.

The Capitalist Model (above) assumes that a system driven by technology can support any level of population growth. There are two kinds of technological change: Endogenous (tech) and Exogenous (TECH). The ECC in this model involves employment (L) and the substitution (or addition) of embodied technology (Fixed Capital) for workers. The original version of the model (from David Ricardo and Karl Marx) assumed that profits were generated from a fixed, subsistence wage (W=wL) when compared to production, R=(Q-wL), thus the ECC = (Q-L). The model is particularly appropriate for Core Countries and for time periods after the Industrial Revolution.

In the Essays on Biography, Part II, John Maynard Keynes wrote about both Malthus and Ricardo and their lengthy correspondence. Keynes felt that the foundations of Economics could have been based on either Malthus or Ricardo, but that Ricardo won to the detriment of future thinking. There is really no reason to have to choose. Both authors had perceptive insights. However, from the standpoint of Systems Theory, it is easier to start with Malthus. The Malthusian ECC can easily be generalized (here, here and here).

It is also important to understand that I am developing conceptual systems. The linkage to real systems is tested using statistical analysis, specifically Dynamic Component Models (DCMs). The reason for DCMs is that Directed Graphs can (1) easily get very complicated, (2) are not Canonical and (3) are isomorphic with a single DCM. For example, the Malthusian model can be easily added to the Capitalist model and both are isomorphic (when statistically estimated) with a DCM. In other words, Directed Graphs help us clarify thinking but they do not related uniquely to some real system.

Also, the DCM model separates growth components (state variables) from feedback components (cyclical variables). The components (state variables) are statistically independent since they are constructed with Principal Components Analysis (PCA). So we can analyze economic growth and business cycles separately and independently and still conduct a systems analysis.

Returning to the problem of whether or not there is a Capitalist World System and, if so, when and where did it develop, my solution would be to test the Malthusian and Capitalist models separately during a specific historical period where data is available. A Capitalist World System model would have to have a Capitalist ECC. For example, the Long Sixteenth Century World System Model (WL16, here) has both an Environmental and a Malthusian ECC. Since the Industrial Revolution Take-off did not happen until the Nineteenth Century (here), the result for L16 makes sense. 

World-Systems Theory looks at a world of countries (systems) under hierarchical control, Core Countries controlling Peripheral Countries. My approach is to test the hierarchical structure using different input variables to a DCM for each country and region. I also include a World System model (for example, WL16) to link directly with the IPCC World models and with the Limits to Growth models.

One more topic to address is attributes of the system: (1) Observability (are all the system states observable), (2) Reachability (are all the states reachable), (3) Controllability (Is the system controllable), (4) Stability (is the system stable), (5) etc. All these attributes are measurable for DCM models (see the dse, Dynamic System Estimation program). These attributes are only available in a formal systems model with clearly defined (through PCA) state variables.

Notes

Readers might wonder why I have not included a Market Model in the basic models above: (1) Both the Malthusian and Capitalist models are conducted in real terms (quantities are divided by prices), (2) there are no markets for population except in a slave system and (3) markets do not actually control the entire socioeconomic system (I prove the issue here).

Here are "Key Characteristics" and "Types of Systems" reported by ChatGPT: