Summary of Thinking in Systems by Donella Meadows: Part 5

Growth in a Constrained Environment

• A physical, growing system is going to run into some kind of constraint, sooner or later. That constraint will take the form of a balancing loop that shifts the dominance of the reinforcing loop that drives the growth behavior. And it’ll do this either by strengthening the outflow or weakening the inflow.
• Growth in a constrained environment is a common experience. Whenever we see a growing entity, we look for both the reinforcing loops that are driving it, and the balancing loops that ultimately will constrain it. Examples of these entities include a population, a corporation, a bank account, a rumor, an epidemic, or sales of a new product.
• These balancing loops are there, even if they’re not dominating the system’s behavior yet, because no real physical system can grow forever in a finite environment. Even a hot new product will saturate the market eventually. And an economy may be constrained by physical capital, monetary capital, resources, or pollution.
• The limits on a growing system may be temporary or permanent. The system may find ways to get around them for a short while or a long while, but sooner or later there will be some kind of accommodation. And in the accommodation come some interesting dynamics.
• Whether the constraining balancing loops come from a renewable or nonrenewable resource makes a difference. This difference, though, is not in whether growth can go on forever, but in how the growth will likely end.

A Renewable Stock Constrained by a Nonrenewable Stock

• Let’s look at a capital system that makes money by extracting a nonrenewable resource. Depreciation is driven by a balancing loop. Specifically, the more capital stock, the more machines there are that wear out, reducing the stock of capital.
• In this example, let’s say that the capital stock of extracting equipment depreciates with a 20-year lifetime. In other words, 5 percent (or 1/20) of the stock is taken out of commission each year.
• On the other hand, the capital stock builds itself up through the reinvestment of profits that come from extraction of the nonrenewable resource. This is the reinforcing loop. In other words, more capital allows for more resource extraction, which creates more profits that can be reinvested.
• Let’s say that the company has a goal of 5 percent annual growth in its capital. Let’s also say that the price of the nonrenewable resource and operating cost per unit of capital are both constant.
• However, what’s not thought to be constant is the yield of resource per unit of capital. Because this resource isn’t renewable, the stock feeding the extraction outflow doesn’t have an input. As the resource is extracted, the next unit of the resource becomes harder to get. For instance, the remaining resource may be deeper down, more dilute, or under less natural pressure to force it to the surface.
• In other words, more costly measures are needed to keep the resource coming. So, there’s a new balancing loop that’ll ultimately control the growth of capital.

The New Balancing Loop

• The more capital stock that you have, the higher the extraction rate of the resource stock. But, the higher the extraction rate, the lower the resource stock. The lower the resource stock, the lower the yield of resource per unit of capital. The lower the yield of resource per unit of capital, the lower the profits when the price of the nonrenewable resource is constant, and the lower the investment rate. And this leads to a lower rate of growth of capital.
• At a certain point, the cost of maintaining the capital stock outweighs the income from resource extraction. And when that happens, profits are no longer sufficient to keep investment ahead of depreciation. As a result, the operation shuts down as the capital stock declines.
• In other words, the higher and faster you grow, the farther and faster you fall when you’re building up a capital stock that’s dependent on a nonrenewable resource.

Other Scenarios

• But what if the original resource is twice as large as you first thought? Or four times as large? Well, in the face of exponential growth of extraction, a doubling of quadrupling of a nonrenewable resource gives little added time to develop alternatives.
• So, if your goal is to extract the resource and make money at the highest possible rate, then the ultimate size of the resource is the most important number in this system. But what if you’re a worker who extracts the resource, and your concern is the lifetime and stability of your job? If that’s the case, you’re not only concerned with the size of the resource, but also the growth rate of capital.
• This is a prime example of the goal of a feedback loop being crucial to the behavior of the system. In other words, the main choice in the management of a nonrenewable resource is whether to get rich very fast, or to get less rich but stay that way longer.
• Earlier, we kept this example simple by saying that the price of the nonrenewable resource was constant. But what if the resource is so vital that in the short term, a higher price won’t decrease demand? In this case, as the resource gets scarce, the price rises.
• The higher price gives the company higher profits, so investment in capital goes up. As a result, the capital stock continues rising, and the more costly remaining resources can be extracted.
• So, the main effect of a rising price is to build a capital stock higher before it collapses. And the same behavior results if prices don’t go up, but technology brings the operating cost of capital down.

If you’d like to review, here are parts one, two, three, and four of this summary.

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