Monetary Circuit Model/Wages and Consumption

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In this lesson, we will add support for the payment of wages by firms. In addition, we add firm revenue from the consumption of goods and services by workers.

The Code[edit]

We add two new parameters and flows for wages and consumption:

# Consumption rate (entire pay spent every 2 weeks)
wcr = 26.0
# Wage rate paid by firms
fwr = 2.0

wages = fwr * fd
cons = wcr * wd

Wages and consumption are both functions of deposits. Once again, this can be considered as a kind of liquidity preference. As firms and households become financially secure, they divert income away from savings and towards investment (hiring workers in the process) and consumption.

Wages are paid from firms deposits to worker deposits. Similarly, purchases are made by transferring from worker deposits to firms deposits:

# ODE system
des = [
	diff(bv, t) == repay - lend,
	diff(bt, t) == 0,
	diff(fl, t) == lend - repay,
	diff(fd, t) == lend - repay + cons - wages,
	diff(wd, t) == wages - cons

The result should look like this:

Monetary circuit workers.svg

The model tends to a general equilibrium, where lending is equal to repayment and consumption is equal to worker income. Workers manage to accumulate a small amount of residual savings whereas firms are in a position of negative equity (assets less than liabilities). This is not unrealistic. In the real world, many firms manage to operate in a position of negative equity. Firms gradually repay debt out of income, then take on new debt to finance investment projects. There need not be any "day of reckoning" where all debts must be payed off. As our model shows, debts can be rolled over indefinitely as long as income is available to service them.

This conclusion also holds when we introduce interest payments in the next lesson.