Economic Systems: The One-Level and Multi-Level Models

Systems Economics Lexicon · Loci, Systems, Semiotics & the Theory of People

A single Activity Cycle describes what one Economic System does. But no Economic System actually operates in isolation — every resource it uses was produced by some other system, performing its own Activity Cycle. The Theory of Economic Systems is what makes that nesting explicit and tractable rather than infinitely regressive.

The one-level model

In the simplest version, a firm’s physiology is studied through its Reoriented Activity Cycle: the Central Department Cycle built around the firm’s own central product-producing activity (2.2.2). The 36 activities of this cycle are called the firm’s departments. Phase 1 departments procure, transport, and store the inputs and subject resources 2.2.2 needs. Phase 2 departments design, produce, and quality-check the product. Phase 3 departments handle the compensation received for it. Phase 4 departments manage the whole process. Each phase also acts on distinct resources — Phase 1 on inputs and subject resources, Phase 2 on the product itself, Phase 3 on the product and its compensation, Phase 4 on everything the firm touches.

But a Central Department Cycle can’t run on its own — it depends on Supporting Cycles that produce the resources it consumes. There are two types: Subject Resource Production Cycles, oriented around producing the subject resources the central cycle deploys, and Input Resource Production Cycles, oriented around producing the inputs it acts upon. Since every Economic System needs at least one subject resource from each of the six categories plus at least one input, there are conventionally seven of these supporting cycles — though in practice, many different specific resources could be produced within any one category.

The multi-level model

Here’s where the nesting actually becomes a model rather than just an observation. Every activity inside the Central Department Cycle — and every activity inside each Supporting Cycle — is itself performed by some Economic System with its own complete Activity Cycle and its own supporting cycles underneath it. The first level below the top agent is called the department level; everything below that is called work groups. Nothing stops here by rule — the theory lets you “zoom in” indefinitely, treating any activity as an infinitely nestable Economic System in its own right, always defined relative to whichever agent you’re currently examining, since any work group could just as easily be the top-level Economic System of an analysis focused on it directly.

This is what makes the theory more than a description of a single firm: because the exact same model applies at every level of the nesting, it can compare firms of completely different structures, locations, times, and scales along the same set of dimensions — a comparison a purely internal, firm-specific analysis could never make on its own.

See also: Central Department Cycle · Economic System (the Locus Model’s Frame Term)

Part of Loci, Systems, Semiotics & the Theory of People, course 3 of 7 in the Locus Theory series. For the full term-by-term specification, see the Lexicon.