The Neoclassical Growth Model

 

When comparing the Classical Economists to the current Economic thinking, it is useful to have the Neoclassical Model (Solow-Swan Model) as a causal diagram for comparison. Expressed in Real terms: (1) N = Population, (2) L = Labor, (3) TECH = technology, (4) Q = Production, and (5) z˚ = Capital stock. Technology and population growth are exogenous.

Adding markets for Labor (where W is Wages), Production (where P is Price) and Investment (where i is the Interest Rate), we get the model above.

From the standpoint of Systems Theory, the problem with the Solow-Swan Model is that it is too narrow. The Balanced-Growth Equilibrium is a more realistic model where all the Variables in an Economic System are growing together. For example, in the UKL19 Model Measurement Matrix, the dominant state space component (UK1) is an approximately equal weighting of all the variables in the model (you can run the UKL19 model here). The Overall Growth Component (state variable) explains 99.5% of the variance in all the indicators.

Balanced Growth theory is an important part of World-Systems development. The other components (UK2 and UK3) are feedback state variables. In the case of the UKL19 model, the feedback components involve two controllers, (1) UK2=(X-U-N)  controlling Urban Population and Export growth and (2) UK3=(XREAL+Q-X-L-U) controlling Export prices (XREAL-X), Output (Q) and Urban Labor. Aside from prices in Export markets, these Historical Controllers (UK1 and UK3) are not captured by Economic Theory but are observed when applying Systems Theory.