The circular-flow approach is decidedly Neoclassical, and suffers from many problems which traditional Austrians would notice. The circular-flow diagram’s greatest problem is, in fact, its circularity.
However horrendous we might find the mass shootings at Columbine, Virginia Tech, and other places, the fact is that when disaffected people start planning mass mayhem, the lack of a gun will not stop them.
So when Henry Paulson argues that it is necessary to pump money into credit markets to prevent them from freezing up, he doesn't bother to realize that the money he pumps into the credit markets is coming directly out of the very same credit markets.
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