Relearning Economics

If you're interested in heterodox macro, financial instability, system dynamics, or alternatives to DSGE, I hope you’ll take a look.

📄 dx.doi.org/10.2139/ssrn...
Feedback, critique, and discussion are very welcome.
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The framework synthesizes:

• Goodwin cycles
• Kalecki's pricing and distribution
• Minsky's financial-instability hypothesis
• Godley & Lavoie SFC accounting
• Keen's debt dynamics, but in continuous time, compatible with simulation.
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This model shows that macroeconomic instability is not a "shock" it's the normal outcome of capitalist feedback structures.

Stability is not an equilibrium property; it's a fragile, temporary configuration of interacting, real, nominal, and financial dynamics.
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The system generates:
• Endogenous business cycles
• Wage–price–profit dynamics
• Private-debt booms & Minskyan crises
• Fiscal-policy stabilization
• Path-dependent nonlinear adjustment, all without any stochastic shocks.
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The reduced form links output, inflation, and the interest rate using observable behavioral relations, not optimization.
It mirrors the NK system structurally, but replaces the microfoundations with:
• Effective demand
• Distributional conflict
• Adaptive expectations
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In this paper, I build a continuous-time, nonlinear, stock–flow-consistent framework that yields its own post-Keynesian 3-equation core:

-Demand–utilization dynamics
-Kalecki–Phillips inflation dynamics
-Adaptive monetary rule
-optional 4th: Minskyan private-debt dynamics
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DSGE models boil the entire economy down to 3 equations:
• IS (Euler equation)
• NK Phillips Curve
• Taylor Rule

But these rest on assumptions that simply don't exist.
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🚨 My new working paper out today

I propose a post-Keynesian, system-dynamics alternative to the New Keynesian DSGE model, one that produces business cycles and financial instability endogenously, without rational expectations or microfoundations.

dx.doi.org/10.2139/ssrn...
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Relearning Economics | Patreon Complex Real World Economics using System Dynamics

Find out more about this on my Patreon:
🧵10/10
www.patreon.com/relearningec...

Economic cycles are classic examples: delayed feedback produces booms and busts.

It isn't "shocks" hitting an otherwise stable system, it's the system's own feedback architecture generating cycles.
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But negative loops don't guarantee stability.

If the corrective action is delayed, because of slow information, slow adjustment, or rigid institutions, the system can overshoot or undershoot its target.

That creates oscillations.
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Everyday examples of negative loops:
• Thermostats
• Cruise control
• Human temperature regulation
• And, in theory, the Marshallian supply-and-demand mechanism

(Though in real economies, information lags and expectations make it much messier than the textbook story.)
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Negative (balancing) loops are goal-seeking.

They work to bring the system back toward some target or desired state.
If the system drifts away from that target, the negative loop kicks in to correct it.
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Positive loops drive trends, economic expansions, speculative bubbles, and path dependency.

Left unchecked, they can push a system into unstable or undesirable states, the classic vicious or virtuous circle.
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Positive (reinforcing) loops occur when a stock creates more of itself.

Examples:
• People create more people
• Money makes more money
• Capital equipment can produce more capital
• Knowledge accumulates into more knowledge
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There are two main types of feedback loops: positive and negative.
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A system's stocks define its current state.

The information that flows back from these stocks (directly or indirectly) controls the system's flows, which then change the stocks again.

That circular causality is what creates loops.
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In system dynamics, stocks and flows create a system's behaviour, but they don’t operate in isolation.

They sit inside webs of interacting feedback loops.

Feedback is simply information about what’s happening in the system’s stocks, fed back to influence its flows.
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Here's an interesting little graph of corporate profits as created from the Levy-Kalecki Equation (Blue) and the NIPA (Red). It looks like the trend is upward since 2000.

(fred.stlouisfed.org/graph/?g=qKZG#0 )

"I sometimes think that economists use decimal points in their forecasts to prove they have a sense of humor."

-William E. Simon
Gazette-Times, Corvallis, OR (1975)

Adam Smith's concept of invisible hands working behind the scenes is, in the case of China, replaced by the thousand arm Buddha's extended and very visible hands"

-Keyu Jin
The New China Playbook: Beyond Socialism & Capitalism (2023)

"Everything reminds Milton Friedman of the money supply. Everything reminds me of sex, but I try to keep it out of my papers."

-Robert Solow
AEA Panel Discussion (1966)

Relearning Economics | Patreon Complex Real World Economics using System Dynamics

Economists don't misunderstand money because it's mysterious.

They misunderstand it because their models assume it away.

If you want to understand the real economy, follow the balance sheets, not the textbooks.
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www.patreon.com/c/relearning...

Until macro takes money seriously, banks, balance sheets, liquidity, payment systems, instability, it'll keep missing what actually drives modern economies.
📎 Minsky (1986)
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The reality is simple:

Money is a set of balance-sheet relationships.

Its creation is institutional.

Its effects are distributional.

And the real constraint is resources, not financial assets.
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Why does all this persist?

Because the models came first, and reality was squeezed in later.

It's easier to bolt on frictions than rethink the core assumptions about equilibrium, rational expectations, and loanable funds.
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Inflation gets the same treatment.
It’s still framed as too much money chasing too few goods, ignoring energy, supply chains, administered prices, and global shocks.

Money is blamed because it's the simplest story.
📎 Storm (2022)
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When the government sells bonds, it’s not raising money, it's just swapping bank reserves for interest-bearing securities.

All that changes is the form of the private sector's assets, not the government’s ability to spend.

The accounting moves, the capacity doesn't.
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The confusion gets worse when it comes to government finance.

A currency-issuing government doesn't borrow like a household.

It spends by creating new liabilities and taxes by deleting them.

Bond sales just swap one type of private asset for another.

📎 Kelton (2020)
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Yet macro models keep leaning on a representative household whose savings supposedly fund investment.

This imaginary person is doing the work actual balance sheets do.

It's sh#tty physics envy. Nothing more than that.
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