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Posts Tagged ‘crisis’

The Politics of Economic Recovery

December 3rd, 2010 3 comments

Editor’s Note: This is a guest post from isee’s training and consulting partner, Corey Peck of Lexidyne LLC.

The mid-term elections are now a month behind us and the political airwaves are still abuzz with commentary about the results.  Exit polls showed that unemployment was at the top of most voters’ list of issues, and that concerns about the federal government’s financial condition (record deficits and debt levels) were a hot topic as well.  Voters appeared to be asking “How can the federal government spend so much money and have so little positive impact on the nation’s economy?” 

The responses by politicians to such an important question are all over the map.  Democrats are claiming that economic conditions would have been much worse if not for massive federal bailouts and stimulus spending.  Republicans are touting the situation as a death knoll for the Obama platform in an effort to position themselves for 2012.  And the Tea Party movement has emerged to push for a roll-back of what they see as an intrusive and ineffective “Big Government”.

But, this political posturing reminds me that one of the true strengths of Systems Thinking is to force people to think very clearly and very operationally about the structure/behavior link embedded in such cases.  A little over a year ago, we sat down with Dr. Mark Paich, who used some very simple stock/flow language and some well-established principles of macroeconomics to lay out some relevant dynamics about the economic crisis and its aftermath:

  • Why the collapse of the housing market made consumers re-evaluate their net asset position and hence started saving more of their incomes to pay off high interest credit card debt.
  • How such actions on the part of consumers, in aggregate, kicked off a vicious cycle of decreased spending and contracting national output.
  • Why government stimulus spending could close some, but not all, of the gap left by suddenly thrifty consumers, and that the recovery was likely to be a long, slow one.

We certainly don’t know how the future will play out, but the data suggest that consumers are indeed cutting back spending, and paying off debt.  (The Bureau of Economic Analysis has terrific historical data on household balance sheets and income.)  The unemployment numbers remain stubbornly high (around 9.5%), and although the recession is technically over, few economists are predicting rapid post-crisis economic expansion.

For a bit of clarity amidst all the rhetoric, you may want to check out Mark’s video offering.  His model and associated explanation do not provide a “magic bullet” of a solution, but they do provide some substance (and perhaps insight) to this vexing situation.  Now if only the politicians could follow suit!

To read a previous blog post about Modeling the Economic Crisis or view a 5-minute video trailer, click here.

What are “Mental Models”?

March 12th, 2010 14 comments

Editor’s note: This is part one of a two part series on Systems Thinking and mental models

In writing and teaching people about Systems Thinking, we often refer to “mental models”.  For some people, this comes as a bit of a surprise, because the context usually involves building models with the iThink or STELLA software.  They don’t expect us to start talking metaphysically about thinking.  “Is this about philosophy or modeling software?” they may wonder.  The software is actually a tool to help construct, simulate and communicate mental models.

Let’s define the term model: A model is an abstraction or simplification of a system.  Models can assume many different forms – from a model volcano in a high school science fair to a sophisticated astrophysical model simulated using a supercomputer.  Models are simplified representations of a part of reality that we want to learn more about.  George Box stated: “Essentially, all models are wrong, but some are useful”.  They are wrong because they are simplifications and they can be useful because we can learn from them.

So, what is a “mental model”?  A mental model is a model that is constructed and simulated within a conscious mind.  To be “conscious” is to be aware of the world around you and yourself in relation to the world.  Let’s take a moment to think about how this process works operationally.

Thinking about trees

Imagine that you are standing outside, looking at a tree.  What happens?  The lenses in your eyes focus light photons onto the retinas.  The photosensitive cells in your retinas respond by sending neural impulses to your brain.  Your brain processes these signals and forms an image of the tree inside your mind.

So at this point, we’ve only addressed the mechanisms by which you perceive the tree.  We have not addressed understanding what a tree is or considered changes over time.   We are dealing with visual information only.  There is nothing within this information that tells you what a tree actually is.

What makes the image of a tree in your minds click as an actual tree that exists right there in front of you?  This is where mental models kick in and you start to think about the tree.  The tree is actually a concept of something that exists in physical reality.  The “tree concept” is a model.  Understanding the concept of a tree requires more information than is available through sensory experience alone.  It’s built on past experiences and knowledge.

A tree is a plant.  It is a living thing that grows and changes appearance over time, often with the seasons.  Trees have root systems.  Trees use leaves for photosynthesis.  Wood comes from trees.  I can state these facts confidently because I have memories and knowledge of trees contained within my mental models.  Mental models contain knowledge and help us create new knowledge.

 

Read more…

Modeling the Economic Crisis

March 8th, 2010 1 comment

I’m often asked by customers that are new to Systems Thinking, “How can this approach add value to conceptualizing and understanding common, everyday issues?”  The issues range from business design to environmental concerns to macroeconomic dynamics.  In response to this question, I can tell you from my personal experience, nothing beats seeing a skilled practitioner use our software tools and the Systems Thinking methodology to make sense out of a complex problem.

With this in mind, we collaborated with our consulting and training partner, Lexidyne LLC, to create a new series of video-based presentations focused on common but often misunderstood problems that can be conceptualized, expanded, and then explored using Systems Thinking.  We recently released the first video in this series — Understanding the Economic Crisis presented by Dr. Mark Paich.

Judging from its title, you might think Understanding the Economic Crisis presents a huge complex model of the macro economy.  To the contrary, dynamic modeling expert, Mark Paich, begins with a very simple model of something we all can relate to — the individual consumer.

Stock and flow map of an individual consumer's balance sheet

Mark expands upon the model and shows how a sudden drop in housing prices affects individual consumption.   As you might expect, when Total Net Worth falls, the individual responds by spending less.  When housing prices fall, home equity loans no longer provide the purchasing power for big ticket items like cars, vacation homes and big screen TVs.

The real surprise however, comes when Mark further expands the individual consumer model to include the economy as a whole.  When everyone’s net worth decreases at the same time a phenomena known as the “Paradox of Thrift” occurs. The paradox states that if everyone tries to save money during times of recession, total savings for the overall economy may fall.  The dynamics generated by adding elements of the macro economy to the model are indeed surprising.

Mark’s easily understood model leads to some real insights concerning the policy implications for an economic recovery.   It also provides a great example of how Systems Thinking can be used to deepen your understanding of a complex issue in order to make better decisions.  If you haven’t seen the video, I highly recommend it.  The following trailer highlights some of the key points in Mark’s presentation and will give you a taste of the full presentation.

(If you cannot see the video below in your RSS reader, please visit the post page)

For more information or to purchase Understanding the Economic crisis, click here.