Concatenated disruptions with resilience

This chapter presents a method for modelling resilience in economic systems confronted by multiple irregular shocks. For this, investment portfolio theory is reformulated as a protected production function. This function determines the share of output that is dedicated to protection as economic agents attempt to maintain their preferred level of consumption and safety in the face of exogenous hazards. With this, resilience becomes the ability of production to withstand and recover from the repeated shocks. This mechanism is illustrated via model comprising aggregated domestic sector and a single export sector trading with a larger regional system. Solving the model, first as a comparative static system gives multiple stable and unstable equilibrium solutions for the level of economic activity. Equating these solutions gives the level of protection that offers greatest well-being. This production–protection relationship is then incorporated into a time-step simulation showing how the economy evolves in response to random shocks and concatenated disturbances, including irregular collapses beyond the desired resilience regime. Within this dynamic model, solutions to the static model appear as weak attractors. Thus, a further contribution of the paper is that it bridges between equilibrium and evolutionary economics, and comparable challenges in other disciplines. The method is advanced as a closure for a social accounting-event matrix based approach.