PETER A. VICTOR

LowGrow SFC is a systems dynamics model. It simulates changes in a wide range of economic, social, and environmental indicators — including GDP, unemployment, public- and private-sector debt, income inequality, work time, GHG emissions, material flows, and the ecological footprint. It does this through the interplay of standard economic factors such as investment in capital, household and government spending, and finance. As well as these demand-side factors, the dynamics of the model are determined on the supply side by the relationship between the capital stock and labor productivity.

LowGrow SFC consists of five interconnected sub-models. The Real Economy sub-model represents the production of goods and services using labor, capital (buildings, equipment, and infrastructure), materials, and energy. In the Financial sub-model, financial flows among the sectors of the economy are tracked, as are their financial assets and financial liabilities. The banking sector creates money by extending loans, subject to capital adequacy requirements set by the central bank. The Electricity sub-model captures the shift from fossil fuels to electricity generated from renewable sources to reduce emissions of GHGs. Other sources of GHG emissions are also included in the Green Investment sub-model. Green investment is investment in real capital with the primary objective of reducing the environmental impacts of economic activities rather than making a profit. It can be additional or non-additional, and productive or non-productive (see Chapter Six). Finally, the flow of materials through the economy — from extraction to wastes — and the ecological footprint from production are simulated in the Materials Flows and Ecological Footprint sub-model.

Models are built for a purpose, and their design is an art as much as a science. Once the purpose is decided, choices must be made about the scope of the model — what to include and what to leave out. Further choices must then be made about what will be determined outside the model (the exogenous variables) and what will be left for the model to determine (the endogenous variables). For example, in LowGrow SFC, population projections published by Statistics Canada are used so population growth is exogenous. Conversely, the rate of economic growth is determined endogenously in the model, based on the ratio of produced capital to labor and other factors. The stock of capital is also determined in the model by investment (endogenous) and the rate of depreciation (exogenous). The structure of LowGrow SFC and relationships among its many variables are informed by theory and statistical analysis taken from a vast literature, and the model is grounded in actual data as far as possible.