Economics Tutorials

Step-by-step guides for economic modeling with Stock-Flow Consistent (SFC) analysis

Introduction to Economics in CircuitJS

CircuitJS has been extended with powerful tools for economic modeling, particularly Stock-Flow Consistent (SFC) analysis inspired by Steve Keen’s Minsky program. These tutorials will guide you through building economic models using circuit simulation concepts.

Tutorial Overview

  • Tutorials 1-3: Getting started with basic concepts (bank accounts, double-entry bookkeeping, banking systems)
  • Tutorial 4: Money from First Principles - Compare Loanable Funds vs. Endogenous Money models to understand money creation and government deficits (based on Steve Keen’s analysis for engineers)
  • Tutorials 6-8: Intermediate to advanced models (debt dynamics, business cycles, international trade)
  • Tutorials 9-11: Mathematical tools and practical applications (MMT, climate economics)

Key Concepts

  • Stocks: Accumulations (bank accounts, inventory, population)
  • Flows: Rates of change (transactions, production, consumption)
  • Consistency: All flows must come from somewhere and go somewhere
  • Balance Sheets: Assets = Liabilities + Equity

Getting Started with Economic Modeling

Tutorial 1: Your First Economic Model - Simple Bank Account

Learn the basics by modeling a bank account with deposits and withdrawals.

What You’ll Learn

  • How to use Table elements for accounting
  • Creating stock variables
  • Modeling flows
  • Maintaining stock-flow consistency

Step-by-Step Instructions

  1. Start with a New Circuit
    • Open CircuitJS
    • Clear the canvas (File > New)
  2. Add a Table Element
    • Right-click on empty space
    • Navigate to: Economics > Table (or press ‘g’ for Godly Table)
    • Place the table on canvas
  3. Configure the Table
    • Right-click the table and select Edit
    • Set title: “Bank Account”
    • Configure 1 stock column: “Deposits”
    • Add rows for:
      • Initial balance: 1000
      • Income flow: 100
      • Spending flow: -80
  4. Run the Simulation
    • Press Run to start
    • Watch the Deposits column accumulate over time
    • Net flow = 100 - 80 = 20 per time period

What’s Happening?

  • The stock (Deposits) integrates the net flow over time
  • Starting from 1000, it increases by 20 each time period
  • This demonstrates the fundamental stock-flow relationship: dStock/dt = Flow

Tutorial 2: Double-Entry Bookkeeping

Model a complete balance sheet using Assets, Liabilities, and Equity.

Theory Review

  • Accounting Identity: Assets = Liabilities + Equity (A = L + E)
  • Every transaction affects at least two accounts
  • The identity must hold at all times

Building the Model

  1. Create a Godly Table
    • Right-click: Economics > Godly Table (or press ‘g’)
    • This provides automatic stock-flow integration
  2. Set Up Columns
    • Column 1: Assets (type: Asset)
    • Column 2: Liabilities (type: Liability)
    • Column 3: Equity (type: Equity)
  3. Add Initial Values
    • Assets: 1000
    • Liabilities: 600
    • Equity: 400
    • Verify: 1000 = 600 + 400 ✓
  4. Add Transaction Rows
    • Row 1: Purchase on credit
      • Assets: +100 (inventory)
      • Liabilities: +100 (accounts payable)
      • Equity: 0
    • Row 2: Sales revenue
      • Assets: +150 (cash)
      • Liabilities: 0
      • Equity: +150 (profit)
  5. Verify Consistency
    • Use Economics > Current Transactions Matrix to visualize flows
    • Watch the balance sheet remain balanced during simulation
    • Assets should always equal Liabilities + Equity

Key Learning Points

  • Double-entry ensures consistency
  • Each transaction preserves the accounting identity
  • Stocks accumulate flows over time
  • The system is always in balance

Tutorial 3: Banking System - Money Creation

Model how banks create money through lending (BOMD - Bank Originated Money and Debt).

Sectors in the Model

  • Banks: Create deposits and loans
  • Firms: Borrow for investment
  • Households: Earn wages, consume

Part A: Simple Bank Lending

  1. Set Up the Bank Balance Sheet
    • Assets: Loans to firms
    • Liabilities: Deposits
    • Equity: Bank capital
  2. Model the Lending Process
    • When bank makes a loan:
      • Bank Assets (Loans): +1000
      • Bank Liabilities (Deposits): +1000
    • Money is created simultaneously!
  3. Use Flow Master and Stock Master
    • Right-click: Economics > Flow Master
    • Right-click: Economics > Stock Master
    • These coordinate the stock-flow dynamics
  4. Add Interest Flows
    • Firms pay interest on loans
    • Interest flows from firm deposits to bank equity
    • Use Percent Meter to calculate interest: rate × principal

Part B: Complete Three-Sector Model

  1. Add Firm Sector
    • Assets: Capital equipment, cash
    • Liabilities: Bank loans
    • Equity: Firm net worth
  2. Add Household Sector
    • Assets: Bank deposits
    • Liabilities: None (or household debt)
    • Equity: Household net worth
  3. Connect the Flows
    • Wages: Firm equity → Household deposits
    • Consumption: Household deposits → Firm equity
    • Investment: Firm deposits → Firm capital
    • Loan creation: Bank creates deposits and loans
  4. Verify Sectoral Balances
    • Sum of all sectors’ net worth = 0 (closed system)
    • Use Current Transactions Matrix to visualize
    • All flows must be accounted for

Intermediate Economic Models

Tutorial 4: Money from First Principles - Loanable Funds vs. Endogenous Money

Build and compare two competing models of banking to understand money creation, based on Steve Keen’s analysis.

Theory: Two Models of Banking

There are two fundamentally different views of how banking works:

  1. Loanable Funds: Banks are intermediaries between savers and borrowers
    • Deposits come first, loans follow
    • Banks lend out existing money
    • Government deficits “crowd out” private investment
    • Fiscal crisis inevitable with sustained deficits
  2. Endogenous Money (BOMD): Banks create money by creating debt
    • Loans create deposits simultaneously
    • Banks originate money, don’t intermediate it
    • Government deficits add to private sector wealth
    • No inherent fiscal crisis from deficits

Part A: Building the Loanable Funds Model

Key Principle: In Loanable Funds, loans appear as assets of households and liabilities of firms, NOT on bank balance sheets as assets.

  1. Create Three Godly Tables
    • Private Banks Table:
      • Assets: Reserves
      • Liabilities: Households, Firms
      • Equity: BanksEquity
    • Households Table:
      • Assets: Households (deposits), DebtFirms (loans to firms)
      • Liabilities: None
      • Equity: HHEquity
    • Firms Table:
      • Assets: Firms (deposits)
      • Liabilities: DebtFirms (borrowed from households)
      • Equity: FirmsEquity
  2. Add Basic Flows (Without Government)
    • Wages: Firms → Households
      • Use Divider: Firms / τFirms × WageShare
      • τFirms ≈ 0.25 (firms spend deposits quarterly)
      • WageShare ≈ 0.6 (60% of GDP goes to wages)
    • Consumption: Households → Firms
      • Use Divider: Households / τHH
      • τHH ≈ 0.5 (households spend deposits biannually)
    • Credit: Households → Firms (intermediated)
      • Use Multiplier: GDP × CreditShare
      • CreditShare ≈ 0.5 (50% of GDP)
    • Interest on Loans: Firms → Households
      • Use Multiplier: DebtFirms × IntRate
      • IntRate ≈ 0.05 (5% per year)
    • Bank Fees: Households → Banks
      • Use Multiplier: Interest × FeeFrac
      • FeeFrac ≈ 0.1 (10% of interest as fees)
  3. Run Initial Simulation
    • Set up scopes to monitor:
      • GDP (total firm deposits / τFirms)
      • Household deposits
      • Firm debt
    • Observe: System is sustainable without government
  4. Add Government Sector
    • Treasury Table:
      • Assets: Government (account at private banks)
      • Liabilities: DebtGov (bonds held by households)
      • Equity: TreasuryEquity
    • Add flows:
      • Tax: Households → Government
        • Use Multiplier: GDP × TaxRate (e.g., 0.2 for 20%)
      • Government Spending: Government → Firms
        • Use Multiplier: GDP × SpendRate (e.g., 0.21 for 21%)
      • Bond Sales: Households → Government
        • Must equal: Deficit + Interest on existing bonds
        • Use Adder: (SpendGov - Tax) + (DebtGov × IntRate)
      • Interest on Bonds: Government → Households
        • Use Multiplier: DebtGov × IntRate
  5. Observe the Crisis
    • Run with 1% deficit (SpendRate = 0.21, TaxRate = 0.2)
    • Watch over 200+ years:
      • Government debt grows exponentially
      • Eventually exceeds 2000% of GDP
      • Interest payments exceed 100% of GDP
      • System becomes unsustainable
    • Conclusion: Under Loanable Funds, sustained deficits cause inevitable crisis

Part B: Building the Endogenous Money Model

Key Principle: In BOMD, both private and government debt are ASSETS of the banking system.

  1. Restructure the Tables
    • Private Banks Table:
      • Assets: Reserves, DebtFirms, DebtGov
      • Liabilities: Households, Firms
      • Equity: BanksEquity
    • Households Table:
      • Assets: Households (deposits only)
      • Liabilities: None
      • Equity: HHEquity
    • Firms Table:
      • Assets: Firms (deposits)
      • Liabilities: None (debt is now bank asset!)
      • Equity: FirmsEquity
    • Central Bank Table:
      • Assets: None
      • Liabilities: Reserves, Government
      • Equity: CBEquity
    • Treasury Table:
      • Assets: Government (at Central Bank)
      • Liabilities: DebtGov (to private banks)
      • Equity: TreasuryEquity
  2. Modify the Flows
    • Wages: Firms → Households (same as before)
    • Consumption: Households → Firms (same as before)
    • Credit: Now creates BOTH:
      • Bank Asset (DebtFirms) increases
      • Firm Liability removed, Firm deposits increase
      • Use same formula: GDP × CreditShare
    • Interest on Private Debt: Firms → Banks
      • Use Multiplier: DebtFirms × IntRate
    • Government Spending: Government → Firms
      • From Central Bank reserves
    • Taxation: Households → Government
      • To Central Bank reserves
    • Bond Sales: Creates bank asset
      • DebtGov increases (bank asset)
      • Government account increases
      • Formula: (SpendGov - Tax) + (DebtGov × IntRate)
    • Interest on Bonds: Government → Banks
      • Use Multiplier: DebtGov × IntRate
    • Remove Fees: Not needed in this model
  3. Key Differences in Implementation
    • In Private Banks Godly Table:
      • Credit flow goes to DebtFirms (Asset column)
      • Bonds flow goes to DebtGov (Asset column)
    • In Firms Godly Table:
      • Credit flow goes to Firms deposits (Asset column)
      • No DebtFirms liability column
    • Money creation formula:
      • dMoney/dt = Credit + (SpendGov + IntGov - Tax)
  4. Run with Same 1% Deficit
    • Set SpendRate = 0.21, TaxRate = 0.2
    • Run simulation for 200+ years
    • Observe:
      • GDP grows steadily
      • Government debt/GDP ratio stabilizes (around 100%)
      • Interest payments remain manageable fraction of GDP
      • No crisis occurs!
  5. Analyze the Key Insight
    • Display sectoral balances using Pie Chart:
      • Private sector equity
      • Government equity (negative)
    • Use Adder to verify:
      • Private Sector Surplus = Government Deficit
      • dPrivateEquity/dt = SpendGov + IntGov - Tax
      • Government “debt” IS private sector wealth

Part C: Comparing the Models Side-by-Side

  1. Create Two Parallel Simulations
    • Save Loanable Funds model as “LF_Model.txt”
    • Save Endogenous Money model as “BOMD_Model.txt”
    • Use separate Scope elements for each
  2. Key Metrics to Compare
    • Debt/GDP ratio over time
    • Interest payments/GDP ratio
    • Private sector wealth
    • System stability
  3. Add Stop Time Elements
    • Set stop at year 50, 100, 150, 200
    • Compare states at each checkpoint
    • Use Pie Charts to show distribution changes

Part D: Real-World Implications

  1. Model Policy Scenarios
    • Austerity: Reduce SpendRate in both models
      • Loanable Funds: Slows crisis but doesn’t prevent it
      • BOMD: Reduces private sector wealth growth
    • Debt Jubilee: Reset DebtGov to zero
      • Loanable Funds: Temporary relief only
      • BOMD: Destroys private sector assets!
    • Inflation: Add price level dynamics (Tutorial 6)
  2. Understanding the Bank of England Position
    • Quote display: “Bank lending creates deposits” (McLeay et al. 2014)
    • Quote display: “Rather than banks receiving deposits… bank lending creates deposits”
    • Model validates the BOMD view
  3. The Accounting Identity
    • Use Current Transactions Matrix to verify:
      • Sum of all financial assets = 0 (conservation law)
      • Government deficit = Private surplus (by identity)
      • Every liability is someone’s asset

Key Learning Points

  1. Structural Differences
    • Loanable Funds: Loans don’t appear on bank balance sheet as assets
    • BOMD: Loans are bank assets, deposits are bank liabilities
    • This structural difference drives completely different dynamics
  2. Money Creation
    • Loanable Funds: Money supply fixed (just redistributed)
    • BOMD: Money supply grows with credit and government deficits
    • Formula: dM/dt = Credit + (SpendGov + IntGov - Tax)
  3. Government Deficits
    • Loanable Funds: Deficits crowd out private sector
    • BOMD: Deficits ADD to private sector wealth
    • Identity: ΔPrivateEquity = -(ΔGovEquity)
  4. Policy Implications
    • If Loanable Funds is correct: Cut spending urgently
    • If BOMD is correct: Deficits support private economy
    • Evidence strongly supports BOMD (Bank of England, Bundesbank)

Advanced Extensions

  1. Add Bank Equity Dynamics
    • Banks can fail if equity becomes negative
    • Model capital adequacy ratios
    • Use Percent Meter: BankEquity / (DebtFirms + DebtGov)
  2. Multiple Interest Rates
    • Different rates for private vs. government debt
    • Risk premiums based on debt ratios
    • Use Equation element for nonlinear rate functions
  3. Central Bank Policy
    • Quantitative easing: CB buys government bonds
    • Reserve requirements
    • Interest on reserves
  4. International Trade
    • Add foreign sector (Tutorial 7)
    • Twin deficits hypothesis
    • Exchange rate effects

Exercise: Test Your Understanding

Build both models from scratch and verify: 1. Under Loanable Funds, can you find ANY deficit level that’s sustainable long-term? 2. Under BOMD, what happens if government runs a surplus? 3. What happens in each model if banks stop lending (Credit → 0)? 4. Can you identify which model matches real-world central bank operations?

Tutorial 6: Debt Dynamics and Stability

Explore how debt levels evolve and affect economic stability.

Minsky’s Financial Instability Hypothesis

  1. Model Debt Service Ratio
    • Use Divider: Debt Service / Income
    • Use Percent Meter to display as percentage
    • Critical threshold: typically 30-40%
  2. Three Borrower Types
    • Hedge: Income covers debt service
    • Speculative: Income covers interest only
    • Ponzi: Income doesn’t cover interest
  3. Build Debt Accumulation
    • Use Integrator for debt stock
    • New borrowing flow
    • Debt service flow
    • Interest rate (Multiply by Constant)
  4. Observe Instability
    • Start with low debt ratios
    • Watch debt compound over time
    • System becomes unstable as ratios increase
    • Use Stop Time element to pause at critical points

Advanced Economic Modeling

Tutorial 7: Keen’s Grasshopper Model

Implement Steve Keen’s simplified business cycle model.

Model Components

  • Wages share of output
  • Employment rate
  • Private debt ratio

Differential Equations

  1. Employment Rate Equation
    • Use ODE element
    • dE/dt = f(wage share, debt)
    • Shows Phillips curve relationship
  2. Wage Share Equation
    • Use ODE element
    • dω/dt = g(employment rate)
    • Models wage bargaining
  3. Debt Ratio Equation
    • Use ODE element
    • dD/dt = h(investment, profits)
    • Captures Minsky dynamics
  4. Connect the System
    • Use Multiplier elements for nonlinear terms
    • Use Adder/Subtracter for combinations
    • Use Differentiator if needed for rates of change

Visualization

  1. Add Multiple Scopes
    • Scope 1: Employment rate over time
    • Scope 2: Wage share over time
    • Scope 3: Debt ratio over time
  2. Use Pie Chart
    • Show factor income distribution
    • Wages vs. Profits vs. Interest
  3. Phase Diagrams
    • Plot employment vs. debt ratio
    • Observe limit cycles
    • Shows complex dynamics

Tutorial 8: International Trade and Exchange Rates

Model open economy with two countries.

Two-Country Setup

  1. Country A Tables
    • Exports (flow out)
    • Imports (flow in)
    • Current account balance
  2. Country B Tables
    • Mirror image of Country A
    • A’s exports = B’s imports
  3. Exchange Rate Mechanism
    • Use Equation element
    • e = f(current account balance)
    • Affects relative prices
  4. Capital Flows
    • Portfolio investment
    • Foreign direct investment
    • Financial account balance

Balance of Payments Identity

  • Current Account + Capital Account + Financial Account = 0
  • Use Current Transactions Matrix for each country
  • Verify global consistency

Mathematical Tools for Economics

Tutorial 9: Using Mathematical Components

Learn to use mathematical operations for economic modeling.

Arithmetic Operations

  1. Adder - Summing Income Streams
    • Multiple income sources
    • Total disposable income
    • Aggregate demand
  2. Subtracter - Net Flows
    • Exports - Imports
    • Revenue - Costs
    • Surplus/Deficit
  3. Multiplier - Interactions
    • Price × Quantity
    • Interest Rate × Debt
    • Tax Rate × Income
  4. Divider - Ratios and Rates
    • Debt/GDP ratio
    • Profit margins
    • Productivity measures

Calculus Operations

  1. Integrator - Stock Accumulation
    • Capital accumulation
    • Debt buildup
    • Population growth
  2. Differentiator - Rates of Change
    • Velocity of money
    • Acceleration effects
    • Growth rates
  3. ODE Solver - Dynamic Systems
    • Predator-prey models (boom-bust cycles)
    • Nonlinear dynamics
    • Complex feedback systems

Display Tools

  1. Percent Meter - Financial Ratios
    • Debt service ratios
    • Reserve ratios
    • Capacity utilization
  2. Pie Chart - Distribution
    • Income distribution
    • Sectoral balances
    • Asset allocation

Practical Applications

Tutorial 10: Modern Monetary Theory (MMT) Models

Build models demonstrating MMT principles.

Model 1: Government as Currency Issuer

  1. Vertical Money Creation
    • Government spending creates deposits
    • Taxation destroys deposits
    • No financing constraint for currency issuer
  2. Build the Circuit
    • Government Table (currency issuer)
    • Private Sector Table
    • Show spending precedes taxation logically

Model 2: Job Guarantee

  1. Buffer Stock of Employment
    • Government employs anyone at fixed wage
    • Countercyclical automatic stabilizer
    • Price stability through wage anchor
  2. Implementation
    • Use Action Time element for shocks
    • Model private sector hiring/firing
    • Government absorbs slack

Tutorial 11: Climate Economics

Model climate change impacts on economy.

Carbon Budget Model

  1. Physical Climate
    • Emissions flow
    • Atmospheric CO2 stock (Integrator)
    • Temperature response (ODE)
  2. Economic Impacts
    • Damage function: Divider for GDP reduction
    • Adaptation costs
    • Mitigation investments
  3. Policy Scenarios
    • Carbon tax: Use Multiply by Constant
    • Green investment: Adjust flow parameters
    • Use Stop Time at 2050 or 2100

Integrated Assessment

  1. Connect Climate and Economy
    • Temperature → Damage → GDP
    • GDP → Emissions → Temperature
    • Feedback loops
  2. Optimization
    • Balance mitigation costs vs. damage costs
    • Net present value calculations
    • Discount rate sensitivity (Multiply by Constant)

Troubleshooting Economic Models

Common Issues

Problem: Accounting Identity Not Balanced

Solutions: 1. Check all flow signs (+ and -) 2. Verify double-entry: every debit has a credit 3. Use Current Transactions Matrix to visualize 4. Check initial values sum correctly

Problem: Stocks Growing Without Bound

Solutions: 1. Add negative feedback loops 2. Check for missing outflows 3. Verify realistic parameter values 4. Add Stop Time element to observe dynamics

Problem: Simulation Unstable

Solutions: 1. Reduce time step (Edit > Options > Time Step) 2. Check for division by zero (use Divider’s epsilon protection) 3. Add damping terms to differential equations 4. Verify initial conditions are reasonable

Practice Exercises

Exercise 1: Sectoral Balance Analysis

Build a three-sector model (Government, Private, Foreign) and: 1. Verify sectoral balances sum to zero 2. Model twin deficits (fiscal and trade) 3. Analyze impact of policy changes

Exercise 2: Credit Cycle Model

Create a model showing: 1. Endogenous money creation through bank lending 2. Asset price inflation from credit growth 3. Minsky moment (debt deflation crisis) 4. Use Pie Chart to show debt distribution

Exercise 3: Income Distribution

Model: 1. Wage vs. profit share dynamics 2. Impact on aggregate demand (Kaleckian) 3. Feedback to employment and growth 4. Use Percent Meters for all ratios

Next Steps

After completing these tutorials:

  1. Explore Pre-built Models: Check out SFC Modeling Guide for complete examples
  2. Read Economics Literature: Steve Keen’s work, Godley & Lavoie’s textbook
  3. Experiment: Modify parameters, add sectors, test policies
  4. Share Your Models: Export circuits and share with the community