Abstract for: Ecological Economic System Modelling With a Focus on Endogenous Innovation and Resilience: Preliminary Results

This paper capitalises on recent developments in the modelling of production functions in dynamic systems and presents an analysis of the effect of innovation on an Ecological Economic Ssystem (EES). Using a dynamic two-sector (resources, manufacturing), three-input (labour, resource, man-made capital) model of an EES. The model employs a normalised CES (NCES) production function to study the effect of relative scarcity between the natural versus man-made capital–the primary issue concerning the strong sustainability criterion–in a time-consistent manner. The production technology, represented by the input substitutability parameter between the natural and man-made capital, is endogenously determined, driven by the relative scarcity of the two inputs. The model extends the literature supporting the analytical focus on a decentralised system outcome with myopic agents, rather than a centralised system based on a benevolent social planner’s infinite-time optimisation. We employ SD modelling to allow complex models not solvable analytically. Preliminary results confirm that letting innovation on input substitutability respond to the relative price of inputs alters the dynamics of the system outcome. Enodogenising innovation on input substitutability, in response to changes in relative scarcity of inputs, relieves pressure on natural resource demand, which makes the dynamics of the system less volatile.