Primer: Agreement Hoarding Behavior Inwards A Sfc Model

In this article, I tweak the simplest Stock-Flow Consistent (SFC) model ("model SIM") to demonstrate the number of hoarding deportment on an economy. This event is non meant to move solely realistic (improvements are discussed), but I role it every bit an event of how the might to tweak models render a proficient platform for learning nearly economics. (The payoff of my Python modelling library is that it should allow users to easily brand such tweaks, without having to hit laborious algebra.) At the destination of the article, I accept a digression which explains how this fits inward alongside the whole "whither economics?" struggle that has shown upward inward recent meshwork give-and-take (on my site, together with elsewhere).

The Difficulty alongside Economics Textbooks

The normal starting indicate for learning nearly a acre is to choice upward an undergraduate textbook. Within economics, this strategy to a greater extent than oftentimes than non does non work.

In club to move comprehensible to undergraduates, a textbook consists mainly of 2 types of material.

1. Rote learning. In economics, this consists of topics such every bit the Definition of GDP, what are cost indices, why unemployment is defined the agency it is, the Definition of diverse monetary aggregate, etc. (The definitions of diverse econometric tools fits inward hither every bit well.)
2. Simple models that undergraduates tin reproduce on an exam, which are supposed to illustrate diverse principles.

If nosotros expect at mainstream undergraduates textbooks (and most of them are mainstream), the rote learning aspect is solely reasonable, whereas the models are an unmitigated disaster. As a result, I believe that people interested inward economic science should choice upward an undergraduate textbook, read the definitional parts, together with non read whatever text that discusses economical behaviour.

Money Flows inward Model SIM

There is at to the lowest degree i exception that I am aware of -- Godley together with Lavoie's Monetary Economics. The focus on the mass is on the models, but it is tied inward alongside the background fabric (if yous read the text, together with non simply fountain to the mathematical bits). The difficulty alongside the methodology used therein is that the equations are derived past times hand, together with in that location are lots of equations. It is hard to play roughly alongside the models, together with reckon how they behave.

Model SIM alongside Profits

I discussed edifice model SIM (from Chapter three of Monetary Economics) using Python inward a recent article.  (For those of yous who hit non accept Monetary Economics, the linked article references other articles which depict the model, together with choice ways of finding the model solution.)

One of the peculiarities of SIM is that occupation organization profits are assumed to move zero, together with that belongings helps eliminate occupation organization sector deportment from the model. This has to move done to brand the model the simplest possible, every bit otherwise occupation organization sector deportment adds novel dynamics. 

Observant readers of the code of my Python model volition accept noted the next lines:

# Influenza A virus subtype H5N1 literally non-profit occupation organization sector

bus = FixedMarginBusiness(can, 'Business Sector', 'BUS', profit_margin=0.0)

What happens if nosotros laid profit_margin to move something other than 0? (For those of yous who wonder I why I specify 0.0 instead of 0, the response is non fake precision, rather that I desire Python to translate the number every bit floating point, together with non an integer.)

I built a model alongside 2 countries, that I labelled "Canada" together with the "United States." The poor Canadian occupation organization sector matches the master model SIM alongside null profits, together with the red-blooded capitalists inward the U.S. of America accept a fixed turn a profit margin of 10%. (Although it is a two-country model, in that location are no cross-border linkages added; I simply seat them into a unmarried model thence that I tin compare the outputs easily. The number of equations explodes, of course.)

The results higher upward demonstrate full output (GDP). What nosotros reckon is that for this elementary model, profits are bad for output.Both countries converge to a steady province value, but the steady province is lower inward the "United States".

Hoarding Business Sector

The nautical chart higher upward explains the root of the problem. The occupation organization sector inward the U.S. of America is assumed to ever accept positive profits, together with it uses those profits to increasingly hoard financial assets.

The financial assets existence hoarded past times the occupation organization sector accept to come upward from somewhere; together with that somewhere is the government. In "Canada", the authorities moves towards a balanced budget (fiscal repose of zero), whereas the "United States" has to run a persistent budget deficit to reckon the demand for hoarding past times the occupation organization sector. (The household sector financial assets -- non shown -- stabilise at a steady province value.)

The Lesson?

It would move quite tardily to imagine the thinking of the hypothetical people living within the model. One would imagine occupation organization leaders inward the U.S. of America wringing their hands nearly persistent authorities budget deficits (and exploding debt-to-GDP ratio), but that is solely the outcome of their hoarding behaviour. If nosotros lump pension funds together with mercantilist key banks within the "business sector," in that location is an analogy to what is happening inward the existent world.

However, these analogies are stretched. The job is that this model has removed capitalists from capitalism. We bespeak to reckon what happens when profits are recirculated via dividends. If nosotros do, nosotros acquire to a greater extent than sensible-looking steady province behaviour. My modelling framework supports that step, together with it volition likely move the dependent acre of a follow upward article (which volition move delayed, every bit I accept a backlog of rants to cover).

Digression: Whither Economics?

Some recent articles accept underlined my sentiment that some of the exterior critics of economic science hit non empathize what is actually going on. (Since I accept no preparation inward economics, I am also an outsider, but I am familiar alongside the issues involved every bit a outcome of my former hateful solar daytime jobs.)

The obvious weaknesses of mainstream models creates a style for outsiders to completely discount the contents of undergraduate economic science textbooks. That is, throwing the infant out alongside the bathroom water. We thence destination upward alongside people attempting to completely reinvent economics, using insights from whatever acre they come upward from. (Physicists are a clear leader inward this category, but us engineers are inward minute place.) 

These outsiders alongside visions of reinventing macro ignore i point: in that location is non a whole lot of struggle nearly the "rote learning" parts of textbooks. Yes, in that location are debates nearly how kind out transactions within the national accounts (and how they should move constructed), but no serious economist debates how the national accounts are currently constructed.

The disputes within economic science revolve around:

1. How hit economical entities behave?
2. How should economies move organised ("normative" debates)?

I seriously doubtfulness that a physicist is going to settle the latter inquiry (normative debates) whatever fourth dimension soon. As for the inquiry of economical deportment ("positive questions"), all I tin state is: proficient luck. Take the electrical current province of affairs inward Canada. The housing marketplace is over-extended inward a fashion real like to that inward the U.S. of America inward 2007. Any economical forecast has to move conditional upon the outlook for housing. However, the odds of creating a mathematical model that tin correctly forecast inflation, unemployment, together with the housing marketplace simultaneously are slim.

The best nosotros tin promise for is to accept a framework to seat our thinking nearly the economy, inward detail the number of policy changes. Stock-Flow Consistent models render such a framework. My promise is that my Python module volition acquire inward easier for people to operate through the basics of how the economical sectors fit together, together with empathize how the behavioural debates bear on observed economical behaviour. Actually playing alongside the models is superior to reading stories nearly them, every bit the storey telling needs to move validated.

Appendix: Python Code

(c) Brian Romanchuk 2016