A simple model of a basic economy
Consider a household which owns an apple orchard and that decides to go into business. They hire workers to expand the orchard, look after
the trees, pick and sell the crop.
The household needs to pay the workers, and to do so they engage the services of a friends who have a
The friends set aside M
100 of Monopoly notes and put them into a piggy bank: this will be the source of all funds for the basic
economy - no more notes will be added nor subtracted. These friends call themselves "The Bank".
The Bank agrees to supply notes to the Orchard Firm at an interest rate of 5% per annum (5% pa).
The Bank in fact sets up two piggy banks - the one that holds the original bank notes (The Vault), and another to manage moneys
coming from interest payments (Bank Assets).
The Firm sets up two piggy banks - one to hold the loan from The Bank, the other to manage moneys coming from the sales of
apples (Firm Deposit Account).
The Workers set up one piggy bank (Workers Deposit Account) to receive payment for their work.
The parameters of the model are shown here:
(M is the (Monopoly) monetary unit of account; pa = per annum)
|Bank Vault starting value
|Bank Vault lend rate
||75% of Vault balance pa
|Loan repayment rate
||2% of Firm's assets pa
|Workers payment rate
||200% of Firm's assets pa
|Workers spend rate
||26 x 100% of Workers savings pa
|Bank spend rate
||100% of Bank Assets pa
To explain these parameters:
The Bank Vault holds only M 100 of notes and no more. To formulate a dynamic model, we need to choose a rate at which The Bank
lends out notes in such a way that the Vault is never overdrawn. This model takes the rate of lending to be 75% of the current Vault balance per annum.
Over time, other things being equal, this would give an ever decaying balance tending to zero.
The Firm repays the Bank loan at a rate of 2% pa of its total assets (loan plus income)
The Firm pays wages at a rate of 200% pa of its total assets (loan plus income). At first sight, this may seem impossible, but remember
that this is a flow (amount per unit time) rather than a stock.
Workers spend their entire paycheck every 2 weeks.
The Banks spends its entire income each year.
Using Steve Keen's program
, the above model can be simulated over time
(Click on image on the right
Download Minsky source for this model: Download link
(rename to remove [.txt]).
A more full explanation together with the equations of this model is here: Model equations
Initial values grow or decay until a steady state is reached after approximately 6 years.
The final (steady state) values are shown below (values in M