Economic Circuit Theory

Abstract

In this paper, we develop what we refer to as economic circuit theory. Our purpose is to exploit the proven effectiveness of electrical circuit theory for the design, modeling, and analysis of complex electrical networks to economic systems; in particular, it permits us to incorporate the dynamics of price into those of the flow of physical commodities, analogous to how this is done for magnetic flux and electrical charge. The theory is agent-based, wherein agents are conceptualized as electrical components and the dynamics are determined by matching the agents' behavioral laws with the constitutive equations of the analogous components. We take a modern graph-theoretic approach, identifying the conditions for stock-flow consistency (Kirchhoff's current law) and price clearing (Kirchhoff's voltage law). With this, we develop the theory to model representative agents (equivalent networks), single-good markets (circuits), and general competitive markets (magnetically coupled circuits). The effectiveness of our theory is demonstrated through a dynamic scenario analysis of the economic circuit model for a two-good market.