A Computer Simulation of Monetary Dynamics

The financial crisis that ran from 2007 to 2009 has been called a “Minsky Moment,” meaning it offered a much-needed reminder to all economists of Hyman Minsky’s neglected dictum that “capitalism is essentially a financial system.”

But even with this reminder, it is hard to know what to do next, since it is difficult to express Minsky’s vision using the standard equilibrium methods of economics. Arguably that is one reason that Minsky has remained a minority taste in economics.

Steve Keen, a grantee of the Institute for New Economic Thinking, wants to change all that by developing a computer simulation tool that captures the monetary side of the economy in a realistic way, including its non-linear dynamic development over time. When Keen is done, students of economics will be able to build their intuition by simulating money flows through the banking system. And professional economists will be able to explore complex interactions without imposing limits of tractability, simply by tweaking the model and seeing what happens.

Keen gives credit to Augusto Graziani’s writings on the monetary circuit for showing him how to translate the complex workings of the monetary economy into something that can be programmed to run on a computer. He met Graziani in 1998, the same year he finished his Ph.D., and has been following the money circuit ever since, first in his own work and now by developing tools for the rest of us. Sometimes new tools are what we need to create new thinking.