CmLab (ConserveMoneyLaboratory)

A NetLogo model in which I investigate the ways in which money supplies adjust to changing economic activities.

CmLab (Conservation of Money Laboratory) - This model economy is designed to be used to explore the phenomenon of the conservation of money in a modern economy. It contains a functioning “fractional reserve banking system” engine, and all transactions are governed by the rules of “double-entry book-keeping”. What makes it dramatically different from any other economic model, I believe, is the lack of prices, or goods and services. In the tradition of Dragulescu and Yakovenko (2000), it is a “capital exchange model” in which money changes hands without the reciprocal exchange of goods and services. 

In this model:

- Three different money supplies function - physical, logical and shadow money supplies;

- The real economy and the financial economy function in parallel;

- Chartered banks have a dual role:

 --- guarding the public trust, and

 --- making a profit;

- Bankruptcies in the real economy provide a source for interest and bank fees;

- The nature of the instabilities in a banking system can be explored; and

- The nature of the phenomenon of “conservation of money” can be explored, and its effects understood.

Capital Exchange Model - For those not familiar with a capital exchange model, it can seem very strange. It is an economic model in which only the “money view” is modeled. For example, when one agent purchases a hammer, say, from another, the money transfer is modeled, but the transfer of the hammer is not, and the price of the hammer is not specified. Prices play no role whatsoever in this economic model. To all appearances, one agent has “given” money to another agent. So, purchases and gifts are rather indistinquishable. Spending by the government or by the banking sector appears very much like a free give-away. Setting aside the cynical reaction you are probably having, this is the fundamental nature of our modern money system. The only thing that matters in such a model is the flow of money through the economy. Since money is conserved, this makes it very similar to a biophysical model through which energy flows, but there are some obvious differences. Money does not degrade and need replenishment the way energy does, so it does not flow from source to sink. Instead, it circulates. Also, there need not be a lack of money as it can be “creatio ex nihilo”. The trick is to determine how much money SHOULD be so created. CmLab is primarily a capital exchange model. Of course, such a monetary system only has real meaning to most of us when it is linked to a biophysical economy, in which the prices of hammers are important. But, to a banker, the “money view” is what it is all about.

Stocks and Flows within CmLab

 - ER - Excess Reserves

 - RR - Required Reserves

 - P0 - Physical money

 - L1-loans - Bank Loans

 - L2-Savings - Savings accts

There is an instability.  The flow of interest to the banks creates a sort of vacuum in the real economy.  Bankruptcies provide a relief valve, of sorts, allowing money to flow back into the real economy.

Historic Background - It is well known that the money supply expands as chartered banks make loans, and contracts as those loans are paid off. When a loan is established, two kinds of money are created that might be called positive and negative money, also called assets and liabilities. Like electrons and positrons, these two kinds of money are created from nothing, and, when they meet again, they disappear. The actions taken by governments to control the size of the money supply are collectively called monetary policy. So it is clear that the amount of money active in an economy at any given time varies greatly. In the 1600s, with the invention of double-entry book-keeping, the ability to ensure that money was strictly conserved on a transaction-by-transaction basis became possible. In the 1800s, the rise of fractional reserve banking enabled the management of money supplies on a national scale. In the 1970s, the application of computers to bank transfers made that possibility a reality on a truly global scale. In this application one can investigate such phenomena as the “time value of money”, or the source of interest, or the effects of bankruptcies.

Concept Development - CmLab is being written as part of a personal study of the dynamics of sustainable economics. During the course of that study I have become aware that at some time in the 1970s the global financial economy became dramatically more active and complex. I have hypothesized that a pair of statistical phemonema have appeared, functioning on a logical platform, and animating that financial economy. That platform I have called the “Law of Conservation of Money”, and this model demonstrates that phenomenon, and allows me to explore its implications. Clearly, I see this as an analogue of the first law of thermodynamics. I see the two statistical dynamics that build upon that platform as:

 - An analogue of the second law of thermodynamics - the production of economic entropy as the economy functions and evolves; and

 - An analogue of the proposed fourth law of thermodynamics - the production of economic complexity as the economy functions and evolves.

Documentation - This model uses a very large number of variables with symbolic names - far more than can be easily described here. An associated user document is available with the software. I started with the standard concepts for money supplies as described in several Wikipedia articles, but found I had to modify those concepts somewhat to make the model function in a sensible fashion. The standard concepts and definitions make sense, perhaps, in a real-world macro-economy, but they are not a useful basis for a bottom-up demonstration of the dynamics of capital exchanges moderated by double-entry book-keeping and by fractional reserve banking. The user is strongly encouraged to consult the user document available here.

However, the code is heavily commented, and those interested are encouraged to print it and read it in detail. For example, of approximately 6,500 printable lines of text in the code tab there are over 2,500 lines of comments and 2,300 lines of native code. The remainder is debug calls and white space, etc. The comments include discussion of “THEORY” that can be detected using the “find” option.

To download the following files, just click on the titles.

CmLab_V1.17.nlogo  - This is the software application.  NetLogo is an interpreted language, and the interpreter needs to be downloaded and installed to make it run.  The interpreter can be downloaded from Northwestern University, at this site.  I used NetLogo 5.0.5 to develop this program, but a more recent interpreter should work well.

The application code can also be obtained from the OpenABM site, or from the NetLogo Modeling Commons site.

From the OpenABM site

From the NetLogo Modeling Commons site

160505 NTF CmLab V1.17 User Doc R3.pdf - This is both user documentation, and some results from a simple run.

160505 NTF Code for CmLab V1.17.pdf - For those who might simply want to see the code without installing the interpretor, use this file.

Some Panels from the Model

Main Panel from CmLab - For a fast start, click Setup and Go.  Controls are available for flows from banks to persons, or persons to banks.  Note that, at tick 1100, most of the wealth is in the real (green) economy, and the banks start with zero wealth.  This slowly reverses bank loans slowly transfer debt (negative money) to the real economy and interest (positive money) to the banks.

This is the first of two significantly different perspectives on the money supply.  This view, as seen by each type of agent, is a higgledy-piggledy briar patch of interacting accounts with credits and debits.  The exact meaning of each is described in the User manual.  Each type of agent plays varying roles in the three types of money supply.

This is the second of two significantly different views of the economy.  Here we see the three types of money supply: physical, logical, and shadow.  These concepts are described in the User Manual.

Note that I had to substantially modify and rationalize the standard concepts of money supply to make them work in a model.

Economic Status at 1100 Ticks - Real Economic Growth Enabled

Economic Status at 48,000 Ticks - Real Economy Massively Deflated

Compare these graphs with those in the previous group of four panels.  In Panels 05 and 07 note how the real economy (green) and the financial economy (red) have switched order.  The financial economy now holds all of the wealth, and the real economy holds all of the debt.  In Panel 08 note how the interest on bank loans (red, far right) massively outsizes the opposing flow, interest on savings. 

Last Updated: June 2016