The Circular Flow Diagram has dominated economic thought for over a century.
Yet, all along we’ve known its shortcomings: over-aggregation, static capital, instantaneous production, and homogeneous factors. It places consumption before production and supports a fantasy macro world where saving is destructive, deficits don’t matter, and MMT makes sense.
But the economy is just too complex to grasp without some sort of simple, realistic model. Attempts to build such models have floundered. Hayek’s Triangles, Böhm-Bawerk’s Concentric Circles, and the Physiocratic Tableau, all leave users perplexed. The obtuse Circular Flow Diagram has simply won by default.
And what a victory! Every high school and college econ text puts it front and center. Thus, countless millions have a cartoonish mental model of the economy and fall prey to the most blatant nonsense. No wonder we’re all Keynesians now!
But by using 3D graphics, we’ve built an Austrian-based model that’s simple, rigorous, and comprehensive. We call it LinKē.
The LinKē Model illustrates the stepwise conversion of natural resources into products via a network of businesses.
Zooming in, we see that each business has specialized capital and workers to accomplish its particular task.
We have disaggregated the Circular Flow Diagram’s interchangeable “labor” into specialized workers operating specific capital.
Zooming back out, we see an economy with heterogeneous capital, specialized workers, and entrepreneurial organization, converting natural resources into products per consumer desires.
LinKē visually represents the traditional factors of production, but in a more granular and realistic way. It also demonstrates the element of time as material moves through the production process.
Then by taking away all but the capital, we see the capital structure with it’s various stages of heterogeneous capital.
Who could look at LinKē and imagine that arbitrarily shifting capital around might be a good idea?
Instead one wonders, “How does this amazing structure arise and what keeps it healthy?”
LinKē has many more tricks. Just as we illustrate the capital structure, we also clearly show the price structure, as well as how the price structure drives the capital structure across time.
Want to see the business cycle? No problem! LinKē videos dynamically show the misallocation of capital into a given sector, along with the migration of workers to that sector, only to be unemployed as the business cycle turns and businesses shrink during the recession.
And what about that “circular flow” of money?
We layer in streams of money going countercurrent to the products, and see price formation as well as the price structure.
Then we run the money through the banking system. LinKē illustrates traditional banking, fractional reserve banking, and central banking. In each case we turn various layers on and off to highlight the features of interest.
We also show price formation happening at the consumer level and propagating back to natural resources by way of the price structure. This allows us to clearly contrast the corresponding lack of consumer price formation in government services.
Want to see a socialist economy with a withered and distorted capital structure delivering scant and low quality products to consumers? Easy peasy.
LinKē is so clear and intuitive that we can teach capital structure, price structure, and business cycle theory to kids as young as ten.
LinKē provides the integrated framework, allowing young students to grasp all aspects of business and economics.
LinKē is at the core of Middle School MBA’s NextGen curriculum.
But static pictures simply don’t do LinKē justice. To truly appreciate LinKē you need to see him in action. Click here for a quick LinKē demo.
Or click here to see LinKē as part of our new video, Zero to Austrian in Twenty Minutes, which explains Austrian Business Cycle Theory to anyone in less than twenty minutes. We think of it as Economics in One Video.
It’s time to end the reign of the Circular Flow Diagram and put the Austrian perspective into everyone’s heads – not just academics or college grads, but every thinking human on the planet.
