The following exposition applies Gurley and Shaw's social, or aggregated, balance sheets (see: Gurley and Shaw.pdf) to the Circular Flow of Income model, as explained by Wikipedia.
I use my balance sheet agent to draw balance sheets. I hope to extend the agent so that it acts on commands such as "Sell X to Y for Z". Such commands are commented out of the script for now; I manually constructed the balance sheets that should result from the implementation of the commands.
The following balance sheet operations are my interpretation of commands such as: Households, sell Labor to Firms for Money. It is possible other balance sheet representations could be used. I have tried to balance +'s and -'s. Where a + is not balanced with a -, money creation is likely occurring.
I start my iteration of the Circular Flow of Income in the Economy by assuming some assets for each of the two sectors in the model:
I assume Firms use Knowledge to produce Goods, given resources such as Labor.> Households: your assets are Land, Labor, Money > Firms: your assets are Knowledge, Money
Note that Money is already in the system, from some external source.
A Government and/or Banking Sector is probably needed here.
For now, sticking to the spirit of the two sector model, assume Firms or Households harvest gold somehow and carry it around.
The next iteration of the two sector Circular Flow of Income model: Households sell Land, Labor to Firms for Money. Firms produce Goods.
Balance sheets for Households and Firms (two initial steps described above shown):
Households
assets | liabilities
-----------------------------------
Land |
Labor |
Money |
---------- |
+Money |
-Labor |
-Land |
|
Firms
assets | liabilities
-----------------------------------
Knowledge |
Money |
---------- |
+Goods |
+Labor |
+Land |
-Money |
|
---
Now Households buy Goods from Firms for Money:
---Households assets | liabilities ----------------------------------- -Money | +Goods | | Firms assets | liabilities ----------------------------------- -Goods | +Money | |
And Households sell Labor to Firms for Money; and Firms produce Goods.
Douglas's A+B Theorem says that Firms will pay Households less Money than needed to purchase all Goods produced.Households assets | liabilities ----------------------------------- +Money | -Labor | | Firms assets | liabilities ----------------------------------- -Money | +Labor | +Goods | |
Thus, Households borrow Money, or get Credit, to buy more Goods.
Firms lend Money to Households, as Credit.
Note: Credit is another Good to Firms. Firms profit from the Financial Good.
The balance sheet of Firms expands on both sides, when +Credit appears as both an asset and a liability.Households assets | liabilities ----------------------------------- +Credit | +Debt -Credit | +Goods | | Firms assets | liabilities ----------------------------------- +Credit | +Credit -Goods | |
Households can convert Credit to Money:
Now Firms must borrow short term to cover daily Money deficits (if they don't have enough Money reserves).Households assets | liabilities ----------------------------------- -Credit | +Debt +Money | | Firms assets | liabilities ----------------------------------- -Money | -Credit
In this last balance sheet represention, Firms borrow Money to cover the credit they extended to Households earlier. Firms now have a Debt liability.Firms assets | liabilities ----------------------------------- +Money | +Credit | +Debt |
Firms can borrow from the Financial Sector, including: Clearinghouses, Fed Funds market, Money Markets, Shadow Banks, Dealers, and others.
The Financial Sector capital asset total is at least ten times bigger than the capital involved in the two sector model. (See: A World Awash In Money, a Bain report.)
---
Full sequence of balance sheets, representing at least two cycles in the Two Sector Circular Flow of Income Model:
---Households assets | liabilities ----------------------------------- Land | Labor | Money | ---------- | +Money | -Labor | -Land | ---------- | -Money | +Goods | ---------- | +Money | -Labor | ---------- | ---------- +Credit | +Debt -Credit | +Goods | ---------- | ---------- -Credit | +Debt +Money | | Firms assets | liabilities ----------------------------------- Knowledge | Money | ---------- | +Goods | +Labor | +Land | -Money | ---------- | -Goods | +Money | ---------- | -Money | +Labor | +Goods | ---------- | ---------- +Credit | +Credit -Goods | ---------- | ---------- -Money | -Credit ---------- | ---------- +Money | +Credit | +Debt |
Todo: Tell program to "Sell 100 Goods to Households for $100 Money"; program manipulates balance sheets to produce the intended results by itself.
Draw balance sheets side-by-side.