1. The Production, Property and Power Model A Visual Model of the Semi-Free-Market Economy
Gordon C. Boronow, FSA, Ph.D. Associate Professor of Economics Nyack College Managing Director, Pol-Econcepts

2. The Venerable Circular Flow Diagram
Shortcomings of the Circular Flow Diagram
Ignores Government Role in the Economy
Cannot Explain Capital Accumulation
Stagnant/Equilibrium
Present Oriented
Consumption-only Model
Source: Internet Image

3. Shortcomings of the Circular Flow Diagram
Ignores Government Role in the Economy
Cannot Explain Capital Accumulation
Stagnant/Equilibrium
Present Oriented
Consumption-only Model

4. A More Complete Teaching Model
Retain as much simplicity as possible
Include the essential decision makers
Bring out the human behavior aspect of economics
Bring out the future orientation of the economy
Reveal the tension and balance in all aspects of the economy

5. Presenting: Production, Property, And Power A Model of a semi-free
market economy

6. The Economic Decision Makers
Who are they?
What factors into their decisions?
What tensions are balanced?
What motivates them?

7. Production, Property, and Power
Household Decision Maker
Concepts:
Enjoyment of Consumption
Security in Property (Savings)
Forward-looking
Cares about Future Households
Balances need for income and security against enjoyment of leisure and consumption now and in the future
Motivated by Desire for a Good Life and Avoidance of Insecurity

8. Production, Property, and Power
Entrepreneur
Concepts:
Innovation, improvements, and growth
Risk-taking, success and failure
Forward-looking
Essential uncertainty of the future
Creative destruction
Balances the cost of money and effort against the likelihood of sufficient future profits to make the venture worthwhile
Motivated by Opportunity for Future Profits

9. Production, Property, and Power
The Financial Intermediary
Concepts:
The Bank Aggregates Savings
The Banker Allocates Capital
(Performs Due Diligence)
“Animal Spirits”
Balances the cost of funds against the potential for a profitable loan transaction
Motivated to Earn Profits for the Bank

10. Production, Property, and Power
Politicians (Government)
Concepts:
Authorized to provide security and control risk through legislation and regulation
Enforced with police power
Constrained by behavioral effects on tax revenues (Laffer curve)
Short-sighted (next election)
“Public Servants” (with Self Interests)
Balances the urge to control against the discontent and tax avoidance of taxpayers
Motivated by an Urge to Control and to Use Power to “do good” (i.e., to implement their “Vision”)

11. The Production Cycle Households: Firms:
Own the resources of the economy (land, labor, capital, ability)
Receive income (wages, rents, interest, profits and welfare) which they save or spend on consumption
Allocate time to work or leisure
Firms:
Produce consumer goods and/or capital goods
Maximize profits by adjusting prices and quantities of production

12. The Production Cycle Households:
Own the resources of the economy (land, labor, capital, ability)
Receive income (wages, rents, interest, profits and welfare) which they save or spend on consumption
Allocate time to work or leisure
Firms:
Produce consumer goods and/or capital goods
Maximize profits by adjusting prices and quantities of production

13. Property Loop: The Head of Household
Chooses how much to spend or save
Savings are converted to property which stores purchasing power for a future household
More property increases the feeling of security for the future
The opposite of saving is borrowing, which transfers purchasing power from the future
Debt reduces net holdings of property, and increases feelings of insecurity

14. Chooses how much to spend or save
Property Loop: The Head of Household
Chooses how much to spend or save
Savings are converted to property which stores purchasing power for a future household
More property increases the feeling of security for the future
The opposite of saving is borrowing, which transfers purchasing power from the future
Debt reduces net holdings of property, and increases feelings of insecurity

15. Property Loop: The Entrepreneur
The Entrepreneur envisions a new idea for a product, a process or a new market
The idea requires resources that the entrepreneur must acquire from retained earnings or from financial markets (e.g. bank)
The resources are used to purchase capital goods in the production cycle
Factor income from the production of capital goods flows back to the households

16. Property Loop: The Entrepreneur
The Entrepreneur envisions a new idea for a product, a process or a new market
The idea requires resources that the entrepreneur must acquire from retained earnings or from financial markets (e.g. bank)
The resources are used to purchase capital goods in the production cycle
Factor income from the production of capital goods flows back to the households

17. Combined Property Cycle
Savings Leave the Production Cycle
Investments Enter the Production Cycle
There is a Gap in the Property Cycle!
“Mind the Gap”

18. Combined Property Cycle
Savings Leave the Production Cycle
Investments Enter the Production Cycle
There is a Gap in the Property Cycle!
“Mind the Gap”

19. A Financial Intermediary: The Banker
Allocates savings to the most profitable (to the bank) projects of the entrepreneurs
Performs “Due Diligence” (a process of risk analysis on each project to protect the bank-and by extension the household-from too much risk)
Affected by “animal spirits”

20. Affected by “animal spirits”
A Financial Intermediary: The Banker
Allocates savings to the most profitable (to the bank) projects of the entrepreneurs
Performs “Due Diligence” (a process of risk analysis on each project to protect the bank-and by extension the household-from too much risk)
Affected by “animal spirits”

21. The Power Loop
Government power is necessary to protect life and property in the economy
Politicians are the embodiment of government
They tax the economy (households, since any tax ultimately affects some household)
They spend the tax, which returns it to the production and property cycles

22. The Power Loop
Government power is necessary to protect life and property in the economy
Politicians are the embodiment of government
They tax the economy (households, since any tax ultimately affects some household)
They spend the tax, which returns it to the production and property cycles

23. The Power Loop: Budget Deficits
Politicians routinely spend more than they collect in taxes
They borrow current resources:
Funded by household savings (assuming no money or credit creation by government is going on)
Reduces resources available to entrepreneurs
Transfers purchasing power from future government to the present government

24. Politicians routinely spend more than they collect in taxes
The Power Loop: Budget Deficits
Politicians routinely spend more than they collect in taxes
They borrow current resources:
Funded by household savings (assuming no money or credit creation by government is going on)
Reduces resources available to entrepreneurs
Transfers purchasing power from future government to the present government

25. Forces exert Pressure in the Economy
Forces in the Economy Market, Psychological and Political Motives
Forces exert Pressure in the Economy
Without Pressure, there is Slack in the Economy
Under Market, Psychological and Political Forces, Slack Gives Way to Pressure, which Tends to Balance
That Unstable Stability is “Equilibrium”

26. Forces in the Economy Market, Psychological and Political Motives
Forces exert Pressure in the Economy
Without Pressure, there is Slack in the Economy
Under Market, Psychological and Political Forces, Slack Gives Way to Pressure, which Tends to Balance
That Unstable Stability is “Equilibrium”

27. Equilibrium: Negatively Defined
Firms are unable to further increase profits
Households are unwilling to work longer hours at the going wages
Households are unwilling to spend or save more at current prices and interest rates
Entrepreneurs do not want to make investments at the current cost of capital
Government is unwilling to increase taxes
Government is unwilling to increase debt

28. Equilibrium: Positively Defined
Firms have maximized profits
Households have maximized the pleasure of consumption and enjoyment of security
Entrepreneurs can finance all the projects they want to implement at the current cost of capital
Government Controllers have provided the maximum degree of security possible given the resources at their disposal

30. The Production, Property and Power Model
A Visual Model of the Semi-Free-Market Economy
The End.