Overview of the Post Keynesian-Institutionalist System Dynamics "Core" Model

The figure above presents an overview of my PKI-SD core model. It consists of six main interacting sectors, five of which constitute the domestic economy and one of which represents the “rest of the world.” The five sectors making up the domestic economy include a household sector, a goods producing sector, a capital producing sector, a financial or banking sector, and a government sector. The government sector is subdivided into a monetary authority and a fiscal authority and these two sub-sectors share a consolidated set of financial accounts.

The PKI-SD model embodies many ideas from Post Keynesian and institutional economics including administered pricing structures, circular and cumulative relationships, endogenous money creation, economic power relationships, path dependent structures, and policies based on, among other things, principles of functional finance. The primary purpose of the model is to explore the dynamics of heterodox theory and policy prescriptions such as employer of last resort programs and various heterodox anti-inflation policies such as TIPS, MAPs, and Mosler pricing. It is termed a “core model” because it is envisioned that it will be extended and modified by others who will use it to look at fresh questions such as the size and scope of the underground economy, the effects of alternative tax, energy, and health care policies on the economy, the future of the Euro and of the U.S. Social Security System, the implications of functional finance for developing nations, and terrorist threats to the banking system. A tool for this purpose is sorely needed as the details of many interesting heterodox policy recommendations have yet to be explored, and conveying many of these recommendations to policy makers and the general public has been difficult. Consider for example the following quotes:

“Stephanie Bell and I have been trying to explain [functional finance] in a series of articles, but have been making little progress because no one can follow balance sheets any more.”

L. Randall Wray

“The [employer of last resort] schemes are underdeveloped and a range of the difficulties which I have raised might be addressed if the ELR schemes were developed beyond the sketch outline stage.”

Malcolm Sawyer