Adaptive Economic Operating System

Stocks, flows and balance sheets

The system state is represented as a vector of coupled stocks — output, employment, investment, household and corporate and government debt, the monetary base, bank deposits, outstanding credit, asset prices, housing affordability and public-service provision, among others — evolving under policy inputs and disturbances.

A few structural features matter enough to call out explicitly:

• Money is not one number. Central-bank money (cash, reserves) and commercial-bank deposit money are distinct stocks. Bank balance sheets must satisfy Assets = Liabilities at every step; new lending expands both sides together (ΔLoans = ΔDeposits), subject to prudential constraints.
• Where credit goes matters, not just how much exists. Credit financing productive capital investment and credit financing purchases of a fixed stock of existing assets have very different system effects — the former raises productive capacity, the latter tends to raise asset prices and collateral values, which can loosen borrowing capacity further (a positive feedback loop worth watching, not assuming away).
• Rent, interest and returns are transfers, not disappearances. A pound of rent leaving a tenant's account is a pound of income for a landlord; what matters for aggregate demand is that tenants and landlords, or borrowers and savers, typically have different marginal propensities to consume, save or invest — so distribution of a given stock of income and wealth affects aggregate outcomes, not only its total.
• Government debt is not a single scalar either. Who holds it (households, banks, institutions, foreign investors, the central bank) determines who receives the corresponding interest income, and therefore how government borrowing interacts with the rest of the system.

None of this requires abandoning standard macroeconomic aggregates — it requires not stopping at them.