Systems Economics: Bringing complexity into post-Keynesian economics to address the 21st Century’s problems

Abstract

The 21st century has presented a complex array of challenges for society. Growth in economic prosperity is stalling and growing inequality, both within and between countries, is leading to social and political tensions. The financial sector, previously seen as a driver of economic development, has become a source of disruption, and has exacerbated economic inequality. Technological advancements, while potentially beneficial, are leading to job displacement and increased economic insecurity. The urgent threat of climate change is prompting calls for rapid transition to low-carbon economies. Damages to the world’s natural environment, for example from resource extraction, continue at a rapid pace. These challenges are closely linked to the process of economic growth. However, current mainstream and heterodox economic theories have proved ineffective at understanding the key mechanisms involved in growth. This thesis builds on three existing strands of heterodox theory to develop a framework for macroeconomic analysis that is aimed specifically at addressing these challenges. The framework is called systems economics, reflecting the integrated nature of our social and natural systems. It builds on the original insights of Veblen, Keynes and Schumpeter. The application of systems economics yields insights into current societal challenges. For example, an alternative description of the process of economic growth is laid out, which emphasises the importance of developing new products, as well as increasing productivity. The important linkages between the financial sector and innovation, which drive economic development, are discussed. Using the systems economics framework, the environmental debate between proponents of green growth and degrowth is neutralised because green growth policies would lead to economic degrowth. Systems economics thus finds eventual limits on rates of economic production. However, it also shows that the more immediate challenge of limiting global warming could be met at much lower cost than current models suggest, with scope for substantial economic benefits in many countries.