Metaphorical Models and Credible Worlds Insights from Small and Stylized Models OR54 Edinburgh September 2012 John Morecroft London Business School

John Morecroft London Business School Outline Stylised Models and Credible Worlds - two classic models from economics Useful Properties of Stylised Models World Dynamics as a Credible World for exploring global industrial growth and sustainability Comments on Modelling, Realism and Learning

John Morecroft London Business School Stylised Models and Credible Worlds Akerlof’s 1970 ‘market for lemons’ Schelling’s 1978 ‘checkerboard city’... based on Robert Sugden’s interpretation

John Morecroft London Business School Useful Properties of Stylised Models Few concepts; clear key assumptions about enduring traits of individuals and/or institutions Skillfully embedded in a ‘context’ Plausible and sufficiently understandable to stimulate comparisons with the real world Vivid interpretation that slips easily between the real world and the model … these properties enable inductive reasoning

John Morecroft London Business School Asset Stocks and Coordination in a Stylised Model of an Industrial Society Capital discard Capital investment Industrial Capital Pollution absorption Pollution generation Pollution Output and Material Standard of Living

John Morecroft London Business School Asset Stocks and Coordination in Jay Forrester’s World Dynamics Model Death Rate Birth rate Population Capital in agriculture Food ratio Land area Adapted from pages of World Dynamics by Jay Forrester, Pegasus Coomunications, Waltham MA Natural resource usage rate Natural resources Capital discard Capital investment Industrial Capital Pollution absorption Pollution generation Pollution Material Standard of Living

Population Quality of Life Natural Resources Pollution Capital John Morecroft London Business School Source: World Dynamics by Jay Forrester, Pegasus Communications, Waltham MA Base Case Archive Simulation of World Dynamics Basic world model behaviour showing the mode in which industrialisation and population are suppressed by falling natural resources

John Morecroft London Business School Source: World Dynamics by Jay Forrester, Pegasus Communications, Waltham MA A 75% technological improvement in the efficiency of resource usage unleashes additional growth that eventually leads to an unintended pollution crisis Population Capital Pollution Quality of Life Natural Resources Better Technology Archive Simulation of World Dynamics

John Morecroft London Business School Towards a Sustainable Industrial Society Archive Simulation of World Dynamics Source: World Dynamics by Jay Forrester, Pegasus Communications, Waltham MA One set of conditions that establishes a world equilibrium at a high quality of life. In 1970 normal capital investment rate is reduced 40 percent, normal birth rate is reduced 30 percent, normal pollution generation is reduced 50 percent, normal natural resource usage rate is reduced 75 percent, and normal food production is reduced 20 percent Population Capital Pollution Quality of Life Natural Resources

John Morecroft London Business School Modelling and Realism – A Spectrum of Model Fidelity Aircraft Flight Simulator to train pilots and rehearse crisis scenarios Schelling’s Checkerboard City to explore the issue of segregation and to challenge preconceptions High fidelity Low fidelity Adapted from Chapter 10 of Strategic Modelling and Business Dynamics by John Morecroft, Wiley World Dynamics to explore the paradox of growth and sustainability in an industrial society Analogue Illustrative Metaphorical Realistic detail Limited detail Minimal detail and accurate scaling yet plausible scaling yet transferable insight

John Morecroft London Business School Thank You

Related Publications Akerlof GA The Market for 'Lemons': Quality Uncertainty and the Market Mechanism, Quarterly Journal of Economics, 84: Forrester JW World Dynamics (2 nd ed.) Pegasus Communications, Waltham MA. The 1 st edition of World Dynamics was published in 1971 by Wright-Allen Press, Cambridge MA. Morecroft JDW Strategic Modelling and Business Dynamics, Wiley, Chichester UK. Morecroft JDW Metaphorical Models for Limits to Growth and Industrialisation, forthcoming in Systems Research and Behavioral Science. Schelling TC Micromotives and Macrobehavior, Norton, New York. Sugden R Credible Worlds: The Status of Theoretical Models in Economics, Journal of Economic Methodology 7: John Morecroft London Business School