Macroeconomics

A reason of why Poverty persists. A System Approach.





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A reason of why Poverty persists:The importance of preventing Negative feedback loops in Economic Growth.


The major focus of the theory about economic growth has been on input aspects of socio-economic interaction. For almost three centuries of economic thought, social scientists have analyzed indeed the production of goods and services from a system perspective. However, by considering heavily scarcity of resources as its main limitation, the approach that much of those scientists and their theories have had is limited to the flows, the stock, and some relationships of the system and to the concept of equilibrium. Certainly, that focus may cover 90% of what is required to understand and forecast many economic phenomena. But its limitation, which may represent 10% of the entire system, may consist on serious balancing loops that affect heavily the overall performance and create what we consider is Poverty. By using a System perspective approach, this paper analyzes a basic economic system and focuses on certain loops that inhibit some economic systems to accumulate wealthy in order to overcome poverty. The first part of the paper briefly shows some of the most relevant economic theories in order to support the assumption that most of them focus on inputs and stocks. The second section of this paper gives the classical examples of disproportionate balancing loops that prevent wealthy accumulation in poor economies. The third section concludes on the importance of controlling balancing loops in socio-economic production and theory. 
Concept framework: between Bertalanffy and Medows. 
Before we start analyzing the system it is good to point out some concepts shared by Bertalanffy’s General Theory of Systems –GTS and Donella Medows’ System Thinking Approach. Basically, the terms that we need to integrate from the GTS are: Wholeness, Equifinality, Causality and Teleology, and Homeostasis. Wholeness refers to a particular understanding of the sum of the elements of any given object or system. It means fundamentally that the whole is more than the sum of its parts. As Donella Medows would say, “a system isn’t just any old collection of things” (Medows, 2008. Pg. 11). 
The other interesting concept is Equifinality. Ludwig Von Bertalanffy stated a new paradigm at mid twenty century when the dominant beliefs in sciences were derived from the nineteen century Positivism. In that historical framework, it was basically understood that any cause has its single effect. Derived from the physic science, the cause-effect concept was understood as a linear relationship. What Bertalanffy added to change that paradigm was that a single effect may be caused by not just one cause but also by more than one, and vice versa. For him, Equifinality is “the tendency towards a characteristic final state from different initial states in a different ways, based upon dynamic interaction” of different causes (Bertalanffy.1968 P. 46). What is seen by Bertalanffy as cause is understood by Medows as Inflow. Likewise, Medows defines flow as any information or material that “enters or leaves a stock over a period of time” (Medow. 2008 Pg. 187). They both agree that a system has certainly inputs that feed the beginning of any processes within a system. 
Medows and Bertalanffy coincide in two more concepts: Teleology and Homeostasis. They both consider that systems have a determined end which is equal to say that they are teleological oriented or end-seekers. Also, the concept of Homeostasis in Bertalanffy’s GTS is understood by Medows as Loops that either reinforce or balance the whole system. Making Bertalanffy coincide with Medows, a Feedback Reinforcing Loop would mean “the homeostatic maintenance of a characteristic state or the seeking of a goal, based upon circular causal chains and mechanisms”. Medows identifies that as Reinforcing Feedback Loops and Balancing Feedback Loops. For both authors, it means that any system has the autonomy to create synergy from its own resources and elements, without having to take any inflow from external sources. That is what explains the wholeness and the idea of reinforcing or balancing powers. 
Another concept in which both authors coincide is Hierarchy. Hierarchy in the context of Medows’ proposal is interpreted as the integration of systems. It means that systems are part of bigger systems in an organized correlation. However in Bertalanffy’s GTS the concept goes further by assigning relevance to causes or inflows. Hierarchy means also that within systems there are elements that are certainly more important than others, or at least affect the performance of the system more heavily (Bertalanffy,1968). From that principle it is possible to understand a non-linear relationship. Considering non-linear concept means that a cause-effect relationship may be either exacerbated or ameliorated by other factors. That gives us the basic understanding of exponential growth. That is a performance that shows the effect of a multiplier force. In terms of Medows it means a Feedback Reinforcing Loop. Finally, as long as we are making an analogy of an economic system, the term Stock means simply Wealth. In our concept framework Wealth is created, multiplied or lost either by the efficient or inefficient interaction of the inflows (Graph #1).
Summarizing the theory of economic growth:
The theory of economic growth has had two major trends in its academic development. Both trends have an emphasis in accumulation of goods and mainly in means of production. Those means of production and goods are represented generally speaking as four factors: labor force, financial capital, land and resources, and knowledge (Graph #1). Thus, economic growth definition depends on the efficient interaction of those factors. Nonetheless, regardless any distribution of those factors in a given society, what does matter is the accumulation of them. Principally, capital in its many forms: financial, human or symbolic. These two major trends consider the accumulation of what from a system perspective are Stocks, and factors as inflows or inputs of a system. Furthermore, what is implicit in the theory of economic growth is that by saying “accumulation” they mean an avoidance of Negative Feedback Loops. However, in the theory of economy of growth those Negatives Feedback Loops are usually underestimated, whereas in System approach they are equally considered as much as other sort of Feedback Loops because of its intrinsic nature of Dynamic Equilibrium.   
Graph #1.
Additionally, there are some specifications that can be easily understood from our perspective. First: within those inflows exists hierarchy that is commonly assigned by the theory. Regardless the theorist, the inflows or factors, that arguably are more important than others, act as Feedback Reinforcing Loops in our scheme. As Solow would argue from our perspective, capital is reinforced by population. For him “the direct consequence of this approach was that the long-run equilibrium growth rate in these models was ultimately tied to demographic factors” (Turnovsky, 2009. Pg.1). Somehow, the relationship that this theory defines between these two factors is linear. The more the population grows, the more the economy grows. Likewise, if the Stock is able to absorb the influx of Financial Capital, then that relationship becomes exponential. That is the reason why we denote Financial Capital not only as inflow but also as a Feedback Reinforcing Loop. 
The trend that Robert Solow initiated made emphasis on exogenous sources as inflows of the wealth creation. In a system approach, the concept of economic growth can be interpreted as an open system in which the factors are nurtured automatically by the population growth. Therefore, Economic Growth is a matter of scale. Whereas for the most recent trend -led by Romer- can be explained as an issue of endogenous recreation of wealth or Stock. Romer “develops a two sector model of a closed economy, where new knowledge produced in one sector is used as input in the production of final output” (Turnovsky, 2009. Pg 4.) In this case the system demonstrates its ability as a synergy creator. Knowledge in this theory is central. For example, the Romer  model “implies that a doubling of the population devoted to research will double the growth rate” (Turnovsky, 2009. Pg.4). Wealth as Stock is recreated, used and reused by any other factor or inflow involved in the system. It is also important to point out that Endogenous theories acknowledge the importance of exogenous influences such as inflation, macroeconomic policies, foreign aid among others. It makes that theory an open system as well. 
   
The importance of preventing Negative feedback loops in Economic Growth: 
So far we have reviewed two general tools for a better understanding of poverty. This perspective allows us to have a comprehensive approach on poverty as an outcome of an unbalanced system. In this section we will provide three examples of countries and societies that prevent somehow wealth creation. Thus, we need to acknowledge that this kind of economic policy has been applied and the outcomes still the same for many countries. The fact of the matters is that poor societies and poverty persists all around the world. The Graph #2 shows just an example of how the government of the United States has risen its spending in form of foreign grants and credits to Africa while diminishing the same funds for the rest of the Western Hemisphere (South and Central America), and Africa is still a poor continent.   



A classic example of poverty: Bangladesh. 
The classic example of an economic system that prevents Stock accumulation is the economy of Bangladesh. If we consider the factor mentioned above as inflows, we can infer that one of them in having a disproportional influence in the Stock which exacerbate poverty creation, or diminish possibilities of wealth accumulation. The following two charts (Graph # 3 and 4) depict the Bangladesh’s economic conditions. The first one shows that the Country is still a receptor of foreign aid, and despite the fact that it is receptor of a good amount of international aid it is still one of the poorest countries in the world. The second one is our interpretation of the problem based on the following explanation. 
“One of the main causes of rural poverty in Bangladesh is the erratic and extreme climate and the fact that a large proportion of the country is low-lying and vulnerable to flooding. Many of Bangladesh’s rural poor people live in areas subject to extreme annual flooding, which can destroy their crops, homes and livelihoods. They often have to resort to moneylenders in order to rebuild their lives, which pushes them deeper into poverty. For the large numbers of rural poor people whose subsistence depends on agriculture, income and food security are highly precarious. Many farmers eke out a livelihood on small and fragmented plots. For those who are landless or almost landless, the situation is even more severe. Almost half of the population falls into this category.
Another root cause of rural poverty has been the enormous population growth and the pressure this has placed on the environment, unleashing problems such as erosion and flooding that in turn aggravate the situation of rural poor people.
Bangladesh has made progress in developing rural infrastructure, but much remains to be done. Many poor people living in remote areas lack services such as education, health clinics and adequate roads, particularly road links to markets. Only 19 per cent of rural households have electricity”
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This explanation can be found virtually anywhere. The Monsoon rainfall Season in Bangladesh is so severe that it is almost impossible to build a house there before the Monsoon devastates anything. It is obviously exacerbated by a severe lack of knowledge and techniques. Also the growth of population diminishes possibilities of prosperity. And finally, Financial Capital is controlled by unscrupulous moneylenders. In System words: Natural Resources play the role of a Balancing Feedback Loop with a strong dominance over the rest of the inputs. It is important to point out that from an economic point of view Natural Resources usually represent comparative advantages instead of Negative Balancing feedback Loops. However, the classical explanation about Bangladesh’s poverty stems principally from its geographical location that makes the country vulnerable to the Monsoon Rainfall.           
Graph #3.
Graph #4. 
Conclusion: 
Two major conclusion may be derived from this analysis: theoretical speaking it is possible to state that the Economic Growth theory has ignored critically the role that Negative Feedbacks Loops may have in the overall performance of given economy. Bangladesh has been sadly known for having this phenomenon. In Bangladesh, what has been considered by the theory as an advantage is its major obstacle for developing and accumulating goods. It has been only from an holistic perspective that economist have come to realize that a general approach on inputs is not enough for such economic conditions. Only by specifying the nature of a Feedback Loop it is possible to understand its effect in the overall outcome. Furthermore, more research is needed in the field of the Theory of economic Growth, which should devote resources to focus on outcomes instead of solely inputs. That sort of economic barriers represented in fatigue, exhaustion and wastes in the economic system should be incorporated not only to the general theory, but also to the economic development policies.   
Bibliography: 
Turnovsky, Stephen J. (2009). Capital accumulation and economic growth in a small open economy. Cambridge, UK ; New York : Cambridge University Press. 
Meadows, Donella. (2008).Thinking In Systems: A Primer. White River Junction, VT: Chelsea Bertalanfy, Ludwig von.(1968). New York, G. Braziller. 

Categories: Macroeconomics

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