What is Minsky?

- Minsky is an Open-Source system dynamics program.

Open-Source means that its code is readily available, and that it is free. To use it, download it from https://sourceforge.net/projects/minsky/, and install it on your computer.

System-dynamics means that it can model two or more factors which cause changes in each other over time.

A simple model of population growth with just one species—Fish, for example—is not a system. It generates the familiar exponential curve of fish numbers growing forever—see Figure 1.

Figure 1: A model of population growth

Nor is a model of population decay with just one species—say, Sharks with no Fish to eat—a system. It generates the opposite effect of exponential decay—see Figure 2 (presumably, the sharks are eating each other as their numbers fall).

Figure 2: A model of population decline

But a model with both Fish and Sharks is a system, and it has a surprising outcome: it never settles down to an equilibrium. Instead, as Figure 3 illustrates, the number of fish and sharks rise and fall in cycles that go on forever.

Figure 3: A system dynamics model of Fish and Sharks

The capacity that system dynamics programs have to model feedback effects between variables frees the modeler from the tyranny of “ceteris paribus”—the bedrock assumption of a conventional first-year course in economics that “all other things remain equal”. With a system dynamics program, you no longer have to make that manifestly assumption, and a much richer and more informative model of the world emerges—for instance, the “predator-prey” model indicates that not all years are the same when you take the risk of sharing the ocean with sharks.

System dynamics programs were first invented in the 1950s by the brilliant MIT Professor of Management Jay Forrester. There are many different programs today—Stella, Vensim, Simulink, System Modeler, to mention but a few. Minsky ’s unique feature in this crowded marketplace is its capacity to model financial dynamics: systems involving the exchange, creation and destruction of money.

Minsky does this using what we call Godley Tables .[1] System dynamics programs were arguably the first-ever computer programs to employ a GUI (“Graphical User Interface”). Godley Tables employ a GUI that long predates computers: the accountant’s device of “Double-entry Bookkeeping”.

Double-entry Bookkeeping (DEB for short) was invented so that merchants could be sure that their financial transactions were accurately recorded. Though it takes a degree in accounting (or at least a course in bookkeeping) to fully understand it, DEB boils down to two simple principles:

2. All financial transactions are recorded twice.

• Assets are financial claims on another person or entity; Liabilities are a financial claim that another person or entity has on you. For any person or entity (a business, charity, etc.), the gap between its Assets and its Liabilities is its net worth, which is called its Equity . The recording of all transactions twice enables a check on the accuracy of an accountant’s books via the formula that: • A −L L L , or • A −L L L AeA LALeA= E ELAE
• In accounting, if a given transaction is properly recorded, then this equation will hold. If there’s a AeA LALeA−E ELAE= 0

In accounting, if a given transaction is properly recorded, then this equation will hold. If there’s a mistake, this equation is violated. This simple set of rules enables accountants to show the state of a business.

Minsky uses this “fundamental accounting equation” to enable you to build a model of financial dynamics easily and rapidly, without the messy wiring of the standard system dynamics “flowchart” paradigm. Instead, we use Godley Tables , where all claims are recorded as either Assets (A) or Liabilities (L), the Equity (E) of each entity in a model is tracked, and any error is checked by the simple rule . Figure 4 show a blank Godley Table . Figure 4: A blank Godley Table A−L−E= 0

Figure 4: A blank Godley Table

This simple GUI makes it easy to answer questions that are still contentious in economics and finance today:

• Do banks lend out deposits, or do they create money “from nothing”?
• Do banks lend out reserves, or do loans create deposits with no need for reserves?

Economics textbooks argue that banks need deposits in order to be able lend, and that reserves— the cash that banks have in their vaults, plus the funds that private banks have in their own deposit accounts at the Central Bank—play an essential role in lending and money creation. In 2014, the Bank of England said that the textbooks were wrong:

“The reality of how money is created today differs from the description found in some economics textbooks:

• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.
• In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.” {McLeay, 2014 #5066, p. 41}

Using a Godley Table in Minsky , you can quickly see for yourself that the Bank of England is correct— “bank lending creates deposits”. There is also something fishy about the two main stories that economics textbooks tell about lending: that banks are just intermediaries who enable savers to lend to borrowers; and that banks “multiply up” reserves in order to create money.

Minsky’s simple interface makes it easy to understand an issue that is still contentious today. The first row in Figure 5 shows the real-world situation: a bank creates money by putting money into a borrower’s bank account, and simultaneously recording the same amount as a debt the borrower owes to the bank.

Figure 5: A Godley Table showing three forms of lending

The second row shows banks “lending from reserves”. It works—Reserves go down and Bank Loans go up— but there’s a problem: how does the borrower get the money?

The third row shows the model of “loanable funds”, where savers lend to borrowers through the intermediary of a bank. Here the borrower gets the money, but to do so, the deposit accounts of savers must fall. But this doesn’t happen with ordinary “at call” bank deposits—if it did, savers would find their accounts going up and down as banks made loans and borrowers paid them back. That just isn’t the case in the real world.

There’s much more to using Godley Tables to create a model, but the tables themselves make it easy to read a model of financial flows. In contrast, the flowchart paradigm—which Minsky also provides—just isn’t as informative when it comes to financial flows: see Figure 6, which shows the same model as in Figure 5, rendered in the market-leading system dynamics program Stella.

Figure 6: The same model as in the Godley Table in Figure 5

Footnotes

1. All financial claims are classified as either Assets or Liabilities; and

1 Minsky was named to honour the great non-mainstream economist Hyman Minsky. Godley Tables are named after his equally great non-mainstream colleague Wynne Godley.