Three Quick Systems Thinking Archetypes in Economics

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This is part of an old assignment I thought might be worth revisiting. I’ll probably cover more archetypes in the future but these are the ones I’ve done already.

Escalation of Externality

This Escalation map is designed to illustrate that there is not only a propensity to ignore negative externalities of competitive industry, but that there is an imperative. If an enterprise is to survive and flourish it must be the one who shows the least regard for the negative externalities it produces. For this example, I will use environmental destruction, but it could also be worker exploitation, health and safety negligence, or any other generally unethical behavior. Link

If Company A sees a rise in competition with company B their market superiority goes down, so their competition level goes up. When their competition level goes up they must increase their aggression in cutting costs to remain competitive. With more limited budgets they must reduce any regard they may have had for the environment. Cost cuts go up, environmental damage goes up, and their superiority in the market goes back up. Once Company B sees their place in the market decreasing, they must increase their competition level, cut costs more aggressively and in turn do more environmental damage. This once again reduces the market superiority of company A who again must increase their competitiveness by cutting costs and so on.

The takeaway from this is to be cynical, but not outraged by private industries fulfilling their goals. The solution isn’t vitriol towards the individuals in charge. It’s a change in the system to be more cooperative, less competitive.

Fixes that Fail: Wage Cuts

In Economics there is no shortage of fixes that fail. I probably could have come up with a better one, but for now I’ll use what I got.

Double line on the right signifies a delay.

When profit margins are too low a potential response could be to lower wages, which would immediately increase profit margins. Over time though, the loss in labor market competitiveness will also lead to an increase in apathy and worker turnover.

The more frequently that workers are inexperienced and require training, the lower productivity goes. As workers are less concerned with losing their job, since they could more easily find the same non-competitive pay elsewhere, their productivity decreases.

As productivity overall decreases profit margins also decrease, reducing or eliminating the purpose of the wage cut. This would only be the case in markets where unemployment is low enough that labor market competitiveness is a significant factor. Link

The solution would be to acknowledge that the wage cut was effectively, but only temporarily masking the fact that the business model was and is failing. A more incisive solution is needed.

Archetypes — Amazon Success to the Successful

As Amazon becomes more dominant in the market, more and more people buy more items from them. Also, the more dominant they become the more favorable regulation they get, which only further increases their revenues. Link

Increased sales increase their efficiency via economies of scale, and therefore their profitability. Their market dominance grows at the expense of competitors, whose sales and then revenue go down. This decline even further improves Amazon’s market dominance. Not shown is the entrance of newly unemployed workers to expand the labor market and potentially lower wages. (If they were ever significantly above minimum wage to begin with.)

I actually made this one before all the New York drama happened. I think the favorable regulation point is well enough exemplified by every city politician coming to kiss the ring, offering tax breaks, even giving away confidential city planning information. The solution is obviously to n̶a̶t̶i̶o̶n̶a̶l̶i̶z̶e̶ ̶A̶m̶a̶z find ways to even the playing field and help smaller firms stay competitive. (Tax relief for smaller firms, higher labor standards for larger firms, etc.)

Political Economic Commentary & Analysis.