Steve Keen has designed a remarkable piece of software called Minsky for dynamic modelling of the economy. The user creates a set of individuals or groups, assigns some initial assets and liabilities to them, and defines some rules for how these change over time. They can then click a button to make time run forwards, and see how the economy evolves over time, as it repeatedly applies the rules.
A key feature of Minsky is the Godley Table, which represents a person’s (or a group’s) balance sheet. It shows both its starting point and the transactions which define the ways in which the assets and liabilities change over time.
In this article, I’ll show how these Godley Tables can be translated to the raw net worth1 concept and the arrow notation of the One Lesson. This will make it easier to understand Keen’s work for anyone familiar with the One Lesson, and hopefully give some fresh insights to anyone whose background is in the Minsky software, due to its intuitive representation.
The first important thing to note is that Minsky only shows the financial economy (just the debt assets and liabilities), and nothing from the real economy (the tangible assets which people own). This means that all the arrows of the One Lesson diagrams will be green, pink or some combination of the two. The other thing to note is that assets and liabilities in Minsky are all money values, never a debt for another type of thing. (Incidentally, these money values don’t have to be fixed at the time the model is created. They can be variable names, which allows the user to run the same model multiple times with different starting parameters. The values can even change during the run of a model).
Example Godley Table
Here’s an example Godley Table for a simple bank, Bank of Eve2:
Along the top are column headings for different types of asset and liability, as well as “equity”. Note that this is significantly different from what the One Lesson means by equity, so it’s safest if I call this Minsky-equity (or M-equity) to avoid any ambiguity. What it means is just:
M-equity is more like net worth than equity, in that there isn’t an equal and opposite entry on someone else’s balance sheet to whom it’s owed (if M-equity is positive) or who owes it (if M-equity is negative). I’ll discuss the significance of this in a later post, because it’s very important for understanding what Minsky models tell us.
By this definition, the A-L-E column should always be zero — as it is in the example. If not, there’s an error in that row of the table. (This is an extremely useful check for the person creating the model).
Initial Conditions
The first row (“Initial Conditions”) shows the balance sheet at the start of the simulation. In this example, the bank starts with £1,000 of cash (represented by the green debt asset token in the balance sheet below), and therefore M-equity (and RNW) of £1,000. Cash is a debt asset of the holder, and a liability of the Bank of England (which would have a corresponding pink token in the liabilities section of its own balance sheet).
Now let’s look at the remaining rows of the Godley Table. Each of these represents the effect on this balance sheet of a transaction, which consists of one or more economic actions. Remember that each economic action (apart from production and consumption) affects two balance sheets. In the diagrams below, the whole of the rest of the world is represented by a group called “etc.”.
Always remember that an arrow representing an action points away from the person or group whose RNW is decreasing (A↓ or L↑), and towards the person or group whose RNW is increasing (A↑ or L↓).
New Bank Loans
Using the One Lesson’s representation of arrows for actions, the “New Bank Loans” row of the Godley Table looks like this:
“Lending” is the number of pounds being lent. The name in (round) brackets is the asset or liability affected. Both arrows are pink-to-green, each representing the creation of a new debt. What is happening is a swap of new debts.
Remembering that the Godley Table only shows the effects of the “Bank of Eve” ends of the arrows, we can see from the top arrow that the “Due From Borrowers” asset is increasing3 by £Lending. And from the bottom arrow, we can see that the “Deposits” liability is increasing4 by £Lending.
Notice that RNW (and M-equity) is both increasing by £Lending (top arrow) and decreasing by £Lending (bottom arrow), so M-equity doesn’t change (as we also see in the Godley Table).
Repayment
The “Repayment” row can be represented like this:
Borrowers are repaying £Repayment. This is the write-off of two debts. (The bank and borrower each agree to discharge equal amounts of debt owed to them by the other). Again, just looking at the “Bank of Eve” ends of the arrows, we can see from the top arrow that the “Due from Borrowers” asset is decreasing by £Repayment. And from the bottom arrow, we can see that the “Deposits” liability is decreasing by £Repayment.
As with “New Bank Loans”, RNW (and M-equity) are both increasing by £Repayment (bottom arrow) and decreasing by £Repayment (top arrow), so again M-equity doesn’t change (as we see in the Godley Table).
The remaining rows only involve a single arrow, and therefore a change in M-equity.
Interest Charged
When a bank charges interest, there is a new debt owed by a borrower to the bank.
Since there is a new debt, the arrow is pink-to-green. The bank’s RNW is increasing (the arrow points to it), and the green tip shows that this is because its assets (in this case its “Due From Borrowers” asset) are increasing.
Notice that we can clearly see from the diagram that the bank’s RNW (and M-equity) is increasing by £Interest, because that is the only arrow pointing towards it or away from it.
Dividend
If the bank has made a profit from charging interest, it can decide to pay a dividend to the shareholders. It does this by creating a deposit for them.
Again, since there is a new debt, the arrow is pink-to-green. The bank’s RNW is decreasing (the arrow points away from it), and the pink base shows that this is because its liabilities (in this case its “Deposits” liability) are increasing.
As with charging interest, we can clearly see from the diagram that the bank’s RNW (and M-equity) is changing (in this case decreasing by £Dividend), because that is the only arrow pointing towards it or away from it.
Summary
The Godley Tables of Minsky show both the initial values of (debt) assets and liabilities for a person or group, and how they change in response to transactions. They also show what is called “equity” in Minsky, and what I’ve labelled “Minsky-equity” or “M-equity”, which is more like RNW in that it is assets minus liabilities. (It’s not quite the same as RNW because Godley Tables don’t show tangible assets, and treat all debts as being for a quantity of money, but it’s pretty close).
Since Godley Tables simply show assets and liabilities, there is a straightforward conversion to the One Lesson’s balance sheets (for the first row) and arrow diagrams showing changes in RNW (subsequent rows). You may find, as I do, that the arrow diagrams are significantly more intuitive than tables showing assets and/or liabilities increasing and/or decreasing.
Someone’s raw net worth (RNW) is what they own plus what they’re owed minus what they owe. It is a “heterogeneous” sum/difference, which just means that things of different types are added and subtracted, not monetary “values” which have been assigned to them.
For simplicity, it’s a bank which doesn’t allow customers to withdraw or deposit cash, or to make payments to, or receive payments from, customers of other banks. And borrowers never default. These are actually very simple transactions to add, but don’t add much to the explanation. I recommend you work out how these would appear — both in Minsky and in the One Lesson diagrams.
An arrow head shows an increase in RNW. The green colour shows this is from an increase in assets.
An arrow tail shows a decrease in RNW. The pink colour shows this is from an increase in liabilities.