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.