I am a lover of grand narratives, ambitious stories that connect happenings across time and space, and that’s why I have named this blog ‘Connections’. Today, I will attempt to show you a powerful analogy, a mental exercise of sort, one that is able to provide a common framework to think about dynamic behaviour in biology, ecology, economics and much more. The mental construct that I will be writing about today is that of stocks and flows.
A stock is a collection of things. Physical things, abstract things, inanimate things, living things. Anything, really! And, flows are the ways in which a stock is replenished or depleted. Another way of thinking about it would be to imagine a world frozen in time. In such a world, the flows cease and only the stocks remain. Imagine a summer storm frozen in time: murky puddles on the streets and giant raindrops suspended like beads in the sky, but no torrential rain, no change, no flow. Stocks come in all sizes, from raindrops, to puddles, lakes or oceans. And flows are always defined with respect to a stock. Opening the hot water tap for a bath is a flow that affects the stock of water in the bathtub, so is drainage. Rainfall is a flow that affects the stock of water in the reservoir behind dams, so is evaporation. Without flows, the stocks do not change.
To be able to differentiate between stocks and flows, and, even better, to be able to identify the flows associated with a certain stock, is very useful. Because, it happens that much of our time is actually spent on managing stocks. Say, our account balance or our weight? Let’s have a look together at the stocks and flows we can distinguish in these activities. I hope that by the end of this exercise, you are able to apply the concept of stocks and flows to whatever problem you happen to be tackling, and derive some insights from its use.
ON MONEY
When I was a child, my only stock of money was cash, that decreased with expenses and increased with my allowances, and these were the only things that I needed to pay attention when it came to personal finance: having enough money to spend by carefully choosing what I wanted (managing the outflow), or nagging my parents for more money (managing the inflow). At this age I learned the first lesson on money: balance your cash flows, do not spend what you don’t have.
Sometime after that, I applied for my first bank account, which meant that there was a virtual resting place for my money, which I can access using cash deposits and withdrawals, or direct transfers to and from my account. Well, that came with some modest bank fees, but it was worth the inconvenience. The management of my financial flows was expanded to the management of my account too: making sure there was enough balance when I made purchases with my card; protecting it from illegitimate transfers made by other people. What? You ask for the interest rate? Given that being able to use my money at all time was the focus of my teenage years, the interest rate that my day-to-day account had was close to nil. At this point, as I started have other sources of income (hello minimum wage!), and the objects of my desire became more expensive, the new financial challenge was to contribute consistently to my savings, not yet for a rainy day, but for some big splurge (hello weekend trip to New York!)
As I became a young responsible adult, it was apparent to me that the old view of my finances was no longer adequate (exactly…!). Not all bank accounts were the same, obviously, and I needed to make a more conscious decision for where to put my money. The generosity of the interest rate, set by the bank, is often linked to the ease of access of that money. By accepting more conditions on when and how I can make deposits, withdraws, and transfers, it was possible to generate a significantly higher interest income via a saving account. And, for most accounts, the banking fees are waived when your account balance is above a certain amount. True, the tax man also comes when the interest income is more significant, but it is possible to defer payment of that tax with some special saving "vehicles", and let compound interest work wonder in the meantime. The mantra at this stage becomes: choose your account terms wisely.
The next rung in personal finance savviness would be to venture out into other forms of investment. Placing one's money in assets which are not exactly money. They come with other, more complicated terms with respect to liquidity. And the yield that they are able to generate is potentially more lucrative, but it also comes with risk of losing your principal as well...
In the terms of stocks and flows, the fundamentals of managing our wealth (a stock) depends on conscious decisions about flows (direct control of income and expenses), and more sophisticated deliberations about the relationship between flows (selection of investment vehicles).
ON WEIGHT
(the diagrams have more details in this section, click on them to expand)
The most visible stock of our health is our body weight. A first level view of this phenomenon is purely physical: we eat food, and the part that is not expelled from our body, eventually becomes part of us in the form of muscle and fat (among other things). Depending on the intensity at which we consume energy to perform physical tasks, the macro-nutrients that we consume, different body composition is achieved via the magical BLACKBOX of PHYSIOLOGY, which I am not illustrating in detail because it is beyond my area of expertise.
The second view on the weighty issue of body weight will be a social one, on what has been happening outside of our bodies. On one hand, our modern life style has changed the way we eat and move. For most of us living in affluent societies, our food intake is no longer limited by the scarcity of food, and we no longer have to manipulate heavy objects out of necessity to survive. The combined effect of more food and less exercise has changed our average body weight and composition compared to those who lived a few generations ago. More likely than not, we are heavier, and have a higher body fat percentage. It is not all grim, however, we also are more likely to have better teeth and enjoy higher life expectancies. The next element to be added to the picture is the dominance of a particular ideal body image, shaped by cultural forces of particular societies. And in the same affluent societies that I have just mentioned, l'image du jour is one that is thin and fit, admittedly one that is very different from the average figure. (My hypothesis, a departure from the topic of today, is that this deviation from the norm, suggesting self-control and other non-mainstream qualities is the very allure of the ideal body. Just as in previous times of food scarcity, plumper figures, denoting wealth and other non-mainstream qualities, was the attraction back then.) Much of the distress we experience toward our own body comes from its departure from the ideal that we embrace. Popular media and common sense tell us that we have two tools at our disposal: imposing limits on food intake, or the time that food remains within our gastrointestinal tract via dieting/purging, or crank up our level of physical activity. Whole industries have been built on the detailed working of diets and exercise, what food (not) to eat, what work out program (not) to take up. We are told that through sheer will, we will able to counter the effect of the dominant lifestyle to achieve the body that we deserve. Or, we can simply change our expectations and be happy with what we already have.
A third perspective on weight zooms in on the individual again. It has been revealed to us that our sheer will and lifestyle factors are not the only forces meddling with our body. There is also our body itself which at times thwart our best efforts to manipulate our weight. First of all, the basal metabolism rate, which accounts for about 60 to 75% of the energy that we spend on a daily basis is largely determined by our lean body mass and our age. Weight control methods that increase our lean body mass, such as muscle building work outs, increases our basal metabolism rate, potentially reinforcing the effects of work out through increasing energy expenditure. On the other hand, weight control methods that deplete our lean body mass such as dieting, decrease our basal metabolism rate, slowing down the rate at which energy is consumed. Secondly, our feeding behaviour, triggered by what we experience as hunger/appetite is regulated via molecular signals in the short and long-term. Leptin, a hormone predominantly synthesized and secreted by fat cells, increases and falls with our body fat store. It can be received by the hypothalamus and other regions of the brain hat control feeding, energy expenditure and hormones, which inhibits hunger. Leptin insensitivity then could result in overfeeding and obesity.
This time, using stocks and flows, we have surveyed the main discussions surrounding the issue of weight. By condensing the key concepts as visual relationships between stocks and flows, we are able to retain a holistic view of the connections between the different perspectives of our debate about weight.
Now that we have had a try at mapping elements of a phenomenon as stocks and flows, I would like you to apply it yourself. To start, find a news article that is making the headlines today, and try to identify the stocks and flows that are involved within. If you need some inspiration, the following topics are usually very fertile ground for stock-and-flow thinking:
- Carbon emissions
- Food production/shortage
- Fossil fuel production/depletion
- Population structure
- Epidemics
- Financial statements (including national accounts)
- Macroeconomic policies
If you feel ambitious, I would like to challenge you to map the less obvious stocks like beliefs, expectations, and the flows of information that change them. Such invisible stocks and flows are usually responsible for driving the physical ones, because us human beings make decisions not only based on the physical state of the world, we give much weight to our beliefs and expectations too. For example: the belief that a desirable GDP should be positive and large could be one stock that drives many decisions taken by countries throughout the world.