Larry Summers; The Foundations for Macroeconomics

Larry Summers is the esteemed former Vice President of Development Economics and Chief Economist of the World Bank, (1991–93), senior U.S. Treasury Department official, ultimately Treasury Secretary (1999–2001), former director of the National Economic Council for President Obama (2009–2010) and former president of Harvard University (2001–2006).

Larry’s Blog of 9/13/2018  asked questions and gave suggestions regarding establishing new foundations for macroeconomics.

As we did in our blog of 9/11/2018 regarding Ray Dalio, let us say in the beginning what we say near the end:

Finally, Larry states that “the arguments that Gennaioli and Shliefer make need to be debated in the profession.” Let us suggest that, before Larry calls for debates among macroeconomists about the obvious inadequacy of present foundations, the entire macroeconomics profession must study carefully Bernard Lonergan’s Macroeconomic Dynamics.  That book has already brought insights from mathematics, physics, and scientific method to the discovery of a radically new foundation. Also, let us advise them how not to react in their reading.  Initially they will find Lonergan’s Functional Macroeconomic Dynamics radically different from the static Walrasian structures they have long espoused and depended upon; they might be inclined gradually to rationalize against its method and tenets; then, instead of embracing it, they might seek arguments to defend themselves against it; finally, having mistakenly persuaded themselves that it is a waste of their precious time, they might put it aside. However, if they courageously and carefully power through Lonergan’s dynamics 3-5 times, they will find themselves saying, “Whoa!  Bernard Lonergan operated from a more profound point of view and discovered a deeper unity in macroeconomics.  With his understanding of what constitutes science and explanation and with his employment of the technique of implicit definition, this polymath has successfully applied his expertise in math, physics, and scientific method to discover a new field theory of macroeconomics, a new paradigm, a whole new theoretical combination of foundation and superstructure which explains both the normative equilibria and maladaptive disequilibria of the intrinsically cyclical, dynamic economic process. This is something of a Copernican Revolution.” Then, rather than calling for debates, let Larry call for elucidation, elaboration and implementation of Functional Macroeconomic Dynamics at the Bureau of Economic Analysis, the Federal Reserve Board, textbook publishers, colleges, and universities.

In his search for a new foundation for macroeconomics, Larry would benefit immensely from reading Lonergan’s Macroeconomic Dynamics.

Lonergan, Bernard (1999), Macroeconomic Dynamics: An Essay in Circulation Analysis, ed. Frederick G. Lawrence, Patrick H. Byrne, and Charles Hefling, Jr., vol 15 of Collected Works of Bernard Lonergan, (Toronto: University of Toronto Press) [referred to as CWL 15]

Lonergan brought a mastery of many subjects to his search for a scientific, fully explanatory macroeconomics.

Using the technique of implicit definition, he established a precise analytical foundation consisting of precise analytical distinctions and relations among interdependentmutually defining and mutually conditioning functional flows of products and payments.  (Refer to A, B, C)  These categories of interdependent functional flows replace both the Bureau of Economic Analysis’ accounting categories and modern economics’ psychological categories of utility, time preference, rational expectations, and irrational behavior. He constructed a new, purely relational field theory of the economic process conceptually prior to and more fundamental than Keynesian and neoclassical theories of human efficient cause. (See Lonergan’s Goal)

Our main concern in this Post is, not so much responding to Larry alone, but rather informing the general public that Lonergan’s Fundamental Macroeconomic Dynamics has developed the foundation Larry is seeking out. But, let us selectively quote Larry, make relevant comments, and quote Lonergan and his commentatorss to substantiate our claim that Lonergan long ago found precisely what Larry is still searching for.

Larry suggests that foundations “should be rooted in theories of how individual businesses make investment decisions.”

Larry is intimating that the foundations of theory reside in the psychology of entrepreneurs rather than in the conceptually prior, more fundamental, primary objective laws of the concrete economic process.  Lonergan’s orientation is opposite to Larry’s.  Lonergan seeks to discover objective laws to which human psychology must adapt.  Thus, Lonergan’s theory of economic motions constitutes “something of a Copernican revolution.”

our inquiry differs radically from traditional economics, in which the ultimate premises are not production and exchange but rather exchange and self-interest, or later, exchange and a vaguely defined psychological situation.  Our aim is to prescind from human psychology that, in the first place, we may define the objective situation with which man has to deal, and, in the second place, define the psychological attitude that has to be adopted if man is to deal successfully with economic problems.  Thus something of a Copernican revolution is attempted: instead of taking man as he is or as he may be thought to be and from that deducing what economic phenomena are going to be, we take the exchange process in its greatest generality and attempt to deduce the human adaptations necessary for survival. [CWL 21,42- 43]

We set out to indicate the existence of an objective mechanical structure of economic activity, of something independent of human psychology, of something to which human psychology must adapt itself if economic activity is not to become a matter of standing in a tub and trying to lift it. [CWL 21, 56]

Our immediate task is to work out the correlations that exist between the velocity and accelerator rhythms of production and the corresponding rhythms of income and expenditure. The set of such correlations constitutes the mechanical structure, a pattern of laws that stand to economic activity as the laws of mechanics to buildings and machines. [CWL 21, 43 ]

Lonergan seeks a generalization of existing macroeconomic theories.  He appreciates the significance of important developments in physical science.

Generalization comes with Newton, who attacked the general theory of motion, laid down its pure theory, identified Kepler’s and Galileo’s laws by inventing the calculus, and so found himself in a position to account for any corporeal motion known.  Aristotle, Ptolemy, Copernicus, Galilei, and Kepler had all been busy with particular classes of moving bodies.  Newton dealt in the same way with all.  He did so by turning to a field of greater generality, the laws of motion, and by finding a deeper unity in the apparent disparateness of Kepler’s ellipse and Galilei’s time squared. … Similarly the non-Euclidean geometers and Einstein went beyond Euclid and Newton. … The non-Euclideans moved geometry back to premises more remote than Euclid’s axioms, they developed methods of their own quite unlike Euclid’s, and though they did not impugn Euclid’s theorems, neither were they very interested in them; casually and incidentally they turn them up as particular cases in an enlarged and radically different field. … Einstein went beyond Newton by employing the new geometries to make time an independent variable; and as Newton transformed the formulation and interpretation of Kepler’s laws, so Einstein transforms the Newtonian laws of motion. … It is, a scientific generalization of the old political economy and of modern economics that will yield the new political economy which we need. … Plainly the way out is through a more general field. [CWL 21, 6-7]

Paraphrasing:

Lonergan moved macroeconomics back to premises more remote than Walrasian statics, microeconomic price theory, neoclassical macroeconomics and Keynesian macroeconomics; he developed the explanatory formulae of a deeper unity, and though he did not impugn them, neither was he very interested in them; casually and incidentally combinations of prices and quantities turn up as particular coincidental cases in an enlarged and radically different field. … Lonergan employed a new field-theory dynamics to make aggregate, mutually-defining, velocitous functionings the basic interdependent variables; and as Newton transformed the formulation and interpretation of Kepler’s laws, so Lonergan transforms neoclassical and Keynesian laws. … He achieved a scientific generalization of the old political economy and of modern economics that yields the new political economy which Larry Summers seeks. … Plainly the way to settle disputes about the immanent intelligibility of the economic process is through a sublating, more general, dynamics of implicitly defined, mutually conditioning functionings.

A rigidly egalitarian system belongs to a perfectly egalitarian world; (however,)a world in which men are, in fact, unequal must find a different system.  What system? If the idealism is sentiment without intelligence, it is as likely as not to mate with the underground cynicism of the revolutionaries to foist upon us a dictatorship of the proletariat in which the proletariat does not dictate, (or) a dictatorship of the Herrenvolk in which the Volk obeys the Fuhrer. But if that idealism can be brought to learn the discipline of logic and of scientific reflection, then it will impose a generalization of the exchange economy.  To determine the nature of such a generalization is the aim of this inquiry; but at once this is at least evident.  The vast forces of human benevolence can no longer be left to tumble down the Niagara of fine sentiments and noble dreams.  They have to be assigned a function and harnessed within the exchange system, for in no other way can that system shake off its fictitious fetters to move consistently towards its maximum. [CWL 21, 36]

Now the movement from a less to a more general level of thought normally involves not only an enlargement but also a readaptation of the whole existing structure.  A more profound viewpoint emerges, and this calls for a readjustment of the less general correlations. [CWL 21, 6]

A mere congeries of laws will not suffice. For if one is to operate upon the concrete, one must be able to employ at once several laws.  To employ several laws at once, one must know the relations of each law to all the others.  But to know many laws, not as a mere congeries of distinct empirical generalizations, but in the network of interrelations of each to all the others, is to reach a system. CWL 3, 76

Lonergan’s theory consists of the explanatory relations among the functional flows of the overall economic functioning.  Thus, because flows are instances of so much or so many every so often, it is a dynamics ,.  His fundamental operators are  d/dt,  d2/dt2, Δ/Δt,  Δ2/Δt2.  He is not concerned with the momentary intersection of atemporal curves; rather he is concerned with the concomitance and balance of explanatory functional flows. The creative shift is the Leibnitz-Newtonian shift

In Lonergan’s circulation analysis, the basic terms are rates– rates of productive activities and rates of payments.  The objective of the analysis is to discover the underlying intelligible and dynamic (accelerative) network of functional, mutually conditioning, and interdependent relationships of these rates to one another.  [CWL 15 26-27  ftnt 27]

Lonergan never used terms for magnitudes, only for rates and their accelerations (‘rates of rates’) in the Essay in circulation Analysis.  [CWL 15, 182]

In order to adapt to a process, one must understand its immanent intelligibility.  Lonergan’s seeks a normative theory of interconnected velocities and accelerations which explains the process. His foundational terms are correlated, interdependent, explanatory functionings.  There is a shift to dynamics.

To our knowledge, no one else considers the functional distinctions between different kinds of productive rhythms (the rhythms based upon the distinctions between basic and surplus and their order of timings) prior to, and more fundamental than, wealth, value, supply and demand, price levels and patterns, capital and labor, interest and profits, wages, and so forth … [CWL 15, Editors’ Introduction lxii]

“Functional” is for Lonergan a technical term pertaining to the realm of explanation, analysis, theory;  … Lonergan (identified) the contemporary notion of a function” as one of the most basic kinds of explanatory, implicit definition – one that specifies ∫ … [CWL 15  26-27 ftnt 27]

In the natural rhythms of productive and monetary orders, there are price and quantity changes.  Price changes can  be real and relative or only monetary and absolute.

Previously I have suggested a lack of adaptation in the free economies to the requirements of the pure cycle.  What that lack is can now be stated.  It is an inability to distinguish between the significanceof a relative and an absolute rise or fall of monetary prices.  A relative (i.e. “real”) rise or fall is, indeed, a signal for a relatively increased or reduced production (of one product relative to another) … Inversely, the rising prices of the surplus expansion are not real and relative but only monetary and absolute rising prices; to allow them to stimulate production is to convert the surplus expansion (of the ideal pure cycle) into a (trade cycleof) boom (which must be followed out of systematic necessity by a correlative and devastating slump).  This I believe is the fundamental lack of adaptation to the productive cycle that our economies have to overcome. [CWL15, 139-140]

To postulate a change may amount to no more than merely describing and reporting the change.  To explain a change is to specify its form, to give its formal cause, immanent intelligibility, reason Why and How.

Speculative excessive expansions and corrections, recessions and depressions can be explained as imbalanced, non-concomitant, and disequilibrated interdependent, mutually conditioning flows.  The normative ideal pure cycle is violated.

Now in any expansion it is inevitable that quantities under production run ahead of quantities sold.  Current production is with reference to future sales, and if there is an expansion, then future sales are going to be greater than current sales.  But in the free economies the acceleration factors (in the basic price-spread ratio) are not held down to the minimum that results from this consideration.  During the surplus expansion the basic price-spread ratio Jwill increase from an increase of R, of a”, and also of a’. The advance of the price-spread ratio will work out through a rise of the basic price level, and selling prices generally will mount.  Now, when prices are rising and due to rise further, the thing to be done is to buy now when prices are low and sell later when they are high.  There results a large amount of liquid investment.  Each producer orders more materials, more semifinished goods, more finished goods, than he would otherwise.  Moreover, he makes this speculative addition to a future demand estimated upon current orders received, so that the further back in the production series any producer is, the greater [will be] the speculative element contained in the objective evidence of current orders received, the more rosy the estimate of future demand, and the greater the speculative element he adds to this estimate when he places orders with a producer still further back in the series. Thus an initial rise in prices sets going a speculative expansion that makes the acceleration factors quite notable, expands the price spread still more, and stimulates a pace of further acceleration that it will be quite impossible to maintain.  Etc. [CWL 15, 160]

The phenomena of our depressions can be explained by our lack of any mechanism that will reduce net aggregate savings smoothly and equitably.  There results the distorted equilibrium conditioned by a rate of losses.  This rate of losses forces a series of contractions and liquidations that characterize the depression. [CWL 15, 156]

One is led immediately to the significance of the basic price spread and the concrete possibility of the business cycle and to the important conclusion that the business cycle is not primarily the result of entrepreneurial greed but of a failure to understand what is going on in an economic expansion…. [Michael Gibbons, Economic Theorizing in Lonergan and Keynes p. 313]

Academic economists fail to explain.  As Larry intimates, they don’t have an adequate dynamic theory.  So, all they can do is postulate without explaining.

A fully explanatory theory of interdependent functional velocities and accelerations distinguishes the intelligible conditions of dynamic equilibrium vs. dynamic disequilibrium, dynamic stability vs. dynamic instability.  Thus it provides insight into, understanding of, and explanation of crises. ( Insight into the Baseball Diamond)

In the excerpts below, note Lonergan’s explanation.  He refers to the double-circuited, credit-centered Diagram of Rates of Interconnected Flows immediately above to explain booms and slumps.  The economic process is a threefold process:[1]

  1. production of consumer goods for the standard of living
  2. production of capital goods for maintenance of existing capital and for acceleration of the process by expansionary capital
  3. Issuance of money to enable transactions

The maintaining of a standard of living is attributed to a basic process (distinct process 1), an ongoing sequence of instances of so much every so often.  The maintenance and acceleration (distinct process 2) of this basic process is brought about by a sequence of surplus stages, in which each lower stage is maintained and accelerated by the next higher.  Finally, transactions that do no more than transfer titles to ownership are concentrated in a redistributive function, whence may be derived changes in the stock of money (distinct process 3) dictated by the acceleration (positive or negative) in the basic and surplus stages of the process. … So there is to be discerned a threefold process in which a basic stage is maintained and accelerated by a series of surplus stages, while the needed additions to or subtractions from the stock of money in these processes is derived from the redistributive area. … it will be possible to distinguish stable and unstable combinations and sequences of rates in the three main areas and so gain some insight into the long-standing recurrence of crises in the modern expanding economy. [CWL 15, 53-54; and 179]

… positive or negative transfers to basic demand (D’-s”I’) and consequent similar transfers to surplus demand (D”-s”I”) belong to the theory of booms and slumps. They involve changes in (aggregate basic or aggregate surplus) demand, with entrepreneurs receiving back more (or less) than they paid out in outlay (which includes profits of all kinds). The immediate effect (of these aberrational monetary transfers) is on the price levels at the final markets, and to these changes (in price), enterprise as a whole responds to release an upward (or downward)  movement of the whole economy.  But the initial increased transfers to demand [that is, excess transfers along (D’-s’I’) and (D”-s”I”) ] are not simply to be supposed.  For that would be postulating without explaining the boom or slump. [CWL 15, 64]

To be sure, human agents are the efficient causes of booms and slumps (Larry’s households and businesses making decisions),whether acting as businessmen deciding to expand or stay pat, or consumers deciding to economize, splurge, or save.  But that does not make the psychology of external, as it were, human agents the primary immanent intelligibility of the objective process; any more than the human, happenstantial initiation of a particular swing of a pendulum constitutes the immanent intelligibility of the motion of a pendulum; or the compression or stretching of a coiled spring; or the projectile; or the four-seam fastball.  The initial conditions and boundary conditions are not the integrand expressing the general law.  Conceptually prior to and more fundamental than outside efficient causes is the immanent intelligibility of the process.

Ought there not to be introduced a technical termto denote this type of intelligibility?  … the intelligibility that is neither final nor material nor instrumental nor efficient causality is, of course, formal causality…what we have called the intelligibility immanent in sensible data and residing in the relations of things to one another, might be named more briefly formal causality… [CWL Insight, 78; x/x]

Paraphrasing:

Ought there not to be introduced a technical term to denote this type of intelligibility in the macroeconomic process?  … the intelligibility that is neither final nor material nor instrumental nor efficient causality is, of course, formal causality…what we have called the field theory or the intelligibility immanent in sensible data of the dynamic economic process and residing in the relations of functional flows to one another, might be named more briefly the formal causality of the economic process… CWL Insight, 78; x/x

It’s not greed; it’s ignorance.

In equity (the basic expansion following the surplus expansion) should be directed to raising the standard of living of the whole society.  It does not. And the reason why it does not is not the reason on which simple-minded moralists insist.  They blame greed.  But the prime cause is ignorance.  The dynamics of surplus and basic expansion, surplus and basic incomes are not understood, not formulated, not taught….. [CWL 15, 82]

When intelligence is a blank, the first law of nature takes over: self-preservation.  It is not primarily greed but frantic efforts at self-preservation that turn the recession into a depression, and the depression into a crash. [CWL 15, 82]

Lonergan argued that  previous depressions could be understood in terms of a tendency by producer-banker combinations with price fixing powers to hang onto the KNaccumulation profit cuminterest rather than raise wages, even after the economy was tooled up to the requirements of the new stationary state.   [Burley and Csapo, 1992-1, 139]

Larry states, “it is best to operate with as fundamental a foundation as possible.”

In economic theory, just as in the construction of a house, the foundation is at the bottom; it is the base which virtually contains the subsequent structure; it is the base upon which the superstructure of a complete theory is constructed.  The foundation must be on the solid ground of precise analytical distinctions which virtually contain the explanation of the process of production and sale rather than on the soft sand of non-explanatory utility, time preference, and rational or irrational behavior.  The foundation must consist of implicitly defined, explanatory terms.

Investigators soon lose the right track if they do not carefully and accurately grasp the goal of their science.  So too, students can have serious difficulties and worries when they do not understand what the goal of their studies is and what means they should use to get there. [CWL 12, 7]

… putting things in their right order is the special talent of the wise person, and so the wise person will start with the problem that is first in the sense (1) that its solution does not presuppose the solution to other problems, (2) that solving it will expedite solving a second problem, (3) that solving the first and second problems will lead right away to solving a third, and so on through all consequent connected problems. [CWL 12, 23]

… the questions are put in such an order that, once the first is solved, the solutions to the others follow with almost no difficulty.  Therefore, because the later solutions are connected to the first as conclusions are connected to some principle, all solutions after the first seem to be the proper province of knowledge. [CWL 12, 25]

… if solving the first problem virtually solves all the others, the concepts and terms in which the first problem and the first solution are defined and expressed cannot be significantly changed if they are to serve to define and express the later problems and solutions. Clearly, then, it is not the arbitrary malice of professors but the interconnected questions and solutions themselves that demand both systematically formed concepts and a technical terminology that corresponds not to any concepts whatsoever but to systematic concepts. [CWL 12, 25]

(If) … imperfect solutions are only partly solutions, … they are also partly new problems.  … The solutions to these new problems come from the very persons whose poor understanding was the source and cause of the new problems in the first place. Thus, a new system arises, but it is just a semblance of a true system.  Its problems do not really exist, its order will please those who have little wisdom, its principle will satisfy only those whose understanding is superficial, and its knowledge will be a morass of obscurity and confusion. [CWL 12, 25-27]

… one who reaches … understanding … that is most fruitful does not solve just one single problem in a sterile fashion …, but solves one problem directly in such a way that one simultaneously reaches a virtual solution of many others. [CWL 12, 43]

The aim of systematics is … to promote understanding.  It does not seek to establish facts.  It strives for some inkling of how it could possibly be that the facts are what they are. [CWL 14, 336]

Lonergan first analyzed the structure of the productive process, because the process of production and sale is the real process for which humans invented money.  Money is the servant of the productive process, not the other way around. (See Why Analyze the Rhythmic Pattern of the Productive First?)

Lonergan … was seeking the explanatory intelligibility underlying the ever-fluctuating rhythms of economic functioning.  To that end he worked out a set of terms and relations that ‘implicitly defined’ that intelligible pattern. When all was said and done the relations, and the terms they implicitly defined, were markedly different from either the terms of ordinary business parlance or the terms of neoclassical and Keynesian economic theory. Moreover, not only did Lonergan’s terms differ, but he also indicated that these aforementioned terms (of neoclassical and Keynesian economic theory) were permeated, as were the terms of Newton’s theory of gravitation, with descriptive, nonexplanatory residues.  Hence, just as a mathematical equation may be said to be the most adequate expression of purely intelligible relations among explanatory terms in certain instances – for example, Einstein’s gravitational field tensor equations – something closely akin to Lonergan’s diagram (and the equations it represents) seems necessary for the realm of dynamic economic functioning.  So, for example, the existence and manner of dynamic mutual interdependence of the two circuits of payment, basic and surplus, is not adequately expressed either by descriptive terms (since this pattern does not directly relate to the senses of anyone operating in a common-sense way in a concretely functioning economy) nor by the series of (simultaneous) equations that do not explicitly manifest the interchanging of ‘flows.’ [CWL 15, 179]

(Lonergan) approaches the focus armed with precise analytic distinctions between basic and surplus (functional flows, outlays, incomes, etc. [CWL 21, xxvi]

“Functional” is for Lonergan a technical term pertaining to the realm of explanation, analysis, theory;  … Lonergan (identified) the contemporary notion of a “function”as one of the most basic kinds of explanatory, implicit definition – one that specifies “things in their relations to one another”… [CWL 15, 26-27  ftnt 27]

Point-to-point vs. point-to-line (i.e. basic vs. surplus) are precise analytical distinctions upon which a superstructure of laws, coherent with one another and comprising a complete theory, may be constructed.  Paraphrasing [CWL 3, 80/103]:

Thus, masses might be defined as the correlatives implicit in Newton’s law of inverse squares.[2]  Then there would be a pattern of relationships constituted by the verified equation; the pattern of relationships would fix the meaning of the pair of coefficients, m1, m2; and the meaning so determined would be the meaning of the name, mass.  In like manner, heat might be defined implicitly by the first law of thermodynamics and the electric and magnetic field intensities, E and H, might be regarded as vector quantities defined by Maxwell’s equations of the electromagnetic field. [CWl 3, 80/102-03]

Paraphrasing

Thus, point-to-point and point-to-line (basic and surplus) might be implicitly defined as the precise analytical correlatives implicit in Schumpeter’s description of economic expansion connecting capital expansion with booms and slumps.  And expenditures and costs might be implicitly defined as the correlatives implicit in Lonergan’s observation that what limits so-called “profit” is macroeconomic costs.  Then there would be a pattern of relationships constituted by the verified classical equation; the pattern of relationshipswould fix the meaning of basic vs. surplus, as well as macroeconomic costs vs. pure surplus income.

Thus Larry’s need and search for as “fundamental a foundation as possible” is realized as a precise analytic distinction regarding the dynamic structure of the multi-levelled, evolutionary, productive process of production, exchange, and finance; i.e. precise analytical distinctions among the most fundamental, implicitly-defined functionings in the objective process; i.e. between terms defined by their functional relations to one another; thus between terms which  explain how the process actually works.

Frish’s failure to develop a significant theory typifies the failure of economists who search for a dynamic heuristic.  As well as a fundamental disorientation of approach there is also a tendency to shift to an inadequate level of abstraction with a premature introduction of boundary conditions in a determinate set of differential and difference equations. [McShane, 1980, 114]

To our knowledge, no one else considers the functional distinctions between different kinds of productive rhythms (the rhythms based upon the distinctions between basic and surplus and their order of timings) prior to, and more fundamental than, wealth, value, supply and demand, price levels and patterns, capital and labor, interest and profits, wages, and so forth … [CWL 15, Editors’ Introduction lxii]

On such a methodological model (i.e. implicit definition of explanatory conjugates superseding nominal definition)… classes of payments (correlated with classes of production functioniungs) quickly become rates of payment standing in the mutual conditioning of a circulation; … and from the foregoing dynamic configuration of conditions during a limited interval of time, there is deduced a catalogue of possible types of change in the configuration over a series of intervals. There results a closely knit frame of reference that can envisage any total movement of an economy as a function of variations in rates of payment, and that can currently define the conditions of desirable movements as well as deduce the causes of breakdowns.  Through such a frame of reference one can see and express the mechanism to which classical precepts are only partially adapted; and through it again one can infer the fuller adaptation that has to be attained. [CWL 21, 111]

Distinctions within the productive order at an adequate level of abstraction thus ground the correlative distinctions in the monetary order of basic and surplus expenditures-called-costs and pure surplus incomes for beneficial expansion of the entire process.

Again, see Lonergan’s Goal

Thus Lonergan would agree with Larry that, “macroeconomics need not be, and probably should not be, built on foundations that center on optimizing decisions by households and firms.”  We note, first, that this assertion seems to contradict or be in a tangle with Larry’s idea that foundations “should be rooted in theories of how individual businesses make investment decisions.”  Second, this contention destroys by a single stroke essays such as AN EXPLORATION OF OPTIMAL STABILIZATION POLICY, by N. Gregory Mankiw and Matthew C. Weinzierl; Working Paper 17029  http://www.nber.org/papers/w17029  

Households and firms are efficient causes.  They are not the prior and more fundamental formal cause or immanent intelligibility of the economic process.  Households and firms act by their own instincts out of ignorance. They fail to understand the immanent intelligibility of the objective process.

Larry states, “some kind of foundation is still required for macroeconomics.”

Lonergan has already established the foundation and its superstructure.  It has just not been promulgated, studied, and implemented.  The treasure chest has not been opened.

Larry refers to “tractable models of expectations in the economy.” And “the vulnerabilities of markets as the bubble before the financial crisis.”

A vulnerability is explained as a systematic requirement for correction of a disequilibrium. Often, an excess has been financed by an excess granting of credit. (See Gjerstad and Smith Post of 3/26/18 on Home page.)  The credit may have been granted for overexpansion of productive capacity, or for purchases in excess of incomes sufficient for principle and interest, or for retirement credits in excess of funds to pay, or for current operations and transfer-entitlement payments.  In any case, entrepreneurs, consumers, homeowners, governments, or private pension plans cannot meet their obligations.  (See in the bibliography: Reinhart, Carmen M. and Kenneth S. Rogoff (2009) This Time Is Different (Princeton, N.J., Princeton University Press [Reinhart and Rogoff] )

One of the practical problems is that the National Income and Product Accounts of the Bureau of Economic Analysis are not explanatory.  (See Revision of the NIPA  into Explanatory Form.)  They do not make manifest in a clear and emphatic way the reliance upon credit of the expansion of production or of consumer purchases.  So, month after month and quarter after quarter, the descriptive and statistical – but not explanatory– reports of GDP fail to alert all participants to the fact of excess credit contaminating the process; i.e. the NIPA fail to provide the precise monetary Why and How of a mysteriously higher GDP.  Was it all financed by sound credit for production or irresponsible credit for irresponsible purchases and promises? (See Gjerstad and Smith Post of 3/26/18 on Home page.)

Again,

Lonergan is alone in using this difference in economic activities to specify the significant variables in his dynamic analysis… no one else considers the functional distinctions between different kinds of (rhythmic production flows) prior to, and more fundamental than, … price levels and patterns, … interest and profits, and so forth….only Lonergan analyzes booms and slumps in terms of how their (explanatory) velocities, accelerations, and decelerations are or are not equilibrated in relation to the events, movements, and changes in two distinct monetary circuits of production and exchange as considered both in themselves (with circulatory, sequential dependence) and in relation to each other by means of crossover payments.[CWL 15, Editors’ Introduction, lxii]

 Functional Macroeconomic Dynamics is a unified field theory and employs the technique of implicit definition.

Our whole structure is purely relational.  A macroeconomic functioning is not a compilation or aggregation of particular income statement categories, such as wages or interest expense.  A macroeconomic functioning is implicitly defined by its functional relation to other functionings.  The whole structure is purely relational.  “Lonergan’s analysis is concrete but heuristic.  It focuses on functional relations intrinsic to the productive process to reach eventually a general theory of dynamic equilibria and disequilibria.”[McShane 1980, 117]

Lonergan’s critique (shows that) by using the technique of implicit definition, the emphasis shifts from trying to define the relevant variables to searching heuristically for the maximum extent of interconnections and interdependence; and that the variables discovered in this way might not resemble very much the objects (or the aggregates) which, in the first instance, one was thinking about. [Gibbons, 1987]

The BEA’s NIPA are compilations of accounting unities.  They are not formulated explanationsof an overall dynamic functioning ( think of a hydrodynamic or electrical circuit) called the economic process.

An ‘accountant’s unity’ … is a category used in (conventional) accounting.  For Lonergan, (conventional) accounting generally denotes an enterprise within common sense which uses descriptive, as contrasted with explanatory terms (on these terms see Insight CWL 3, 1992: 37-38/61-62, 178-79/201-3, 247-48/272-73). Insofar as that is true, the accountant’s unity is not an adequate index for the normative, explanatory analysis of the productive process. [CWL 15, 26, ftnt 26]

Again: “Functionalis for Lonergan a technical term pertaining to the realm of explanation, analysis, theory;  … Lonergan (identified) the contemporary notion of a functionas one of the most basic kinds of explanatory, implicit definition – one that specifies “things in their relations to one another”… [CWL 15, 26-27  ftnt 27]

Lonergan … was seeking the explanatory intelligibility underlying the ever-fluctuating rhythms of economic functioning.  To that end he worked out a set of terms and relations that ‘implicitly defined’ that intelligible pattern.  When all was said and done the relations, and the terms they implicitly defined, were markedly different from either the terms of ordinary business parlance or the terms of neoclassical and Keynesian economic theory.  Moreover, not only did Lonergan’s terms differ, but he also indicated that these aforementioned terms (of neoclassical and Keynesian economic theory) were permeated, as were the terms of Newton’s theory of gravitation, with descriptive, nonexplanatory residues.  Hence, just as a mathematical equation may be said to be the most adequate expression of purely intelligible relations among explanatory terms in certain instances – for example, Einstein’s gravitational field tensor equations – something closely akin to Lonergan’s diagram (and the equations it represents) seems necessary for the realm of dynamic economic functioning.  So, for example, the existence and manner of dynamic mutual interdependence of the two circuits of payment, basic and surplus, is not adequately expressed either by descriptive terms (since this pattern does not directly relate to the senses of anyone operating in a common-sense way in a concretely functioning economy) nor by the series of (simultaneous) equations that do not explicitly manifest the interchanging of ‘flows.’ [CWL 15, 179]

Larry speaks of “the kind of perspectives that could have prevented or at least mitigated its consequences.”

The necessary perspective is a complete, fully explanatory, normative theory. It reveals an ideal pure cycle at the root of the trade cycle of boom and slump.  This theory will yield laws to which participants must adapt. It will constitute something of a Copernican revolution.

Again, in a selective review:

our inquiry differs radically from traditional economics, in which the ultimate premises are not production and exchange but rather exchange and self-interest, or later, exchange and a vaguely defined psychological situation.  Our aim is to prescind from human psychology that, in the first place, we may define the objective situation with which man has to deal, and, in the second place, define the psychological attitude that has to be adopted if man is to deal successfully with economic problems.  Thus something of a Copernican revolution is attempted: instead of taking man as he is or as he may be thought to be and from that deducing what economic phenomena are going to be, we take the exchange process in its greatest generalityand attempt to deduce the human adaptations necessary for survival. [CWL 21,42- 43]

We set out to indicate the existence of an objective mechanical structure of economic activity, of something independent of human psychology, of something to which human psychology must adapt itself if economic activity is not to become a matter of standing in a tub and trying to lift it. [CWL 21, 56]

Our immediate task is to work out the correlations that exist between the velocity and accelerator rhythms of productionand the corresponding rhythms of income and expenditure. The set of such correlations constitutes the mechanical structure, a pattern of laws that stand to economic activity as the laws of mechanics to buildings and machines. [CWL 21, 43 ]

“Functional”is for Lonergan a technical term pertaining to the realm of explanation, analysis, theory;  … Lonergan (identified) the contemporary notion of a “function”as one of the most basic kinds of explanatory, implicit definition – one that specifies “things in their relations to one another”… [CWL 15, 26-27  ftnt 27]

Point-to-point vs. point-to-line (i.e. basic vs. surplus) are precise analytical distinctions upon which a superstructure of laws, coherent with one another and comprising a complete theory, may be constructed.  Paraphrasing [CWL 3, 80/103]:

Our whole structure is purely relational.  A macroeconomic functioning is not a compilation or aggregation of particular income statement categories, such as wages or interest expense.  A macroeconomic functioning is implicitly defined by its functional relation to other functionings.  The whole structure is purely relational.  “Lonergan’s analysis is concrete but heuristic.  It focuses on functional relations intrinsic to the productive process to reach eventually a general theory of dynamic equilibria and disequilibria.”[McShane 1980, 117]

Lonergan moved macroeconomics back to premises more remote than Walrasian statics, microeconomic price theory, neoclassical macroeconomics and Keynesian macroeconomics; he developed the explanatory formulae of a deeper unity, and though he did not impugn them, neither was he very interested in them; casually and incidentally combinations of prices and quantities turn up as particular coincidental cases in an enlarged and radically different field. … Lonergan employed a new field-theory dynamics to make aggregate, mutually-defining, velocitous functionings the basic interdependent variables; and as Newton transformed the formulation and interpretation of Kepler’s laws, so Lonergan transforms neoclassical and Keynesian laws. … He achieved a scientific generalization of the old political economy and of modern economics that yields the new political economy which Larry Summers seeks. … Plainly the way to settle disputes about the immanent intelligibility of the economic process is through a sublating, more general, dynamics of implicitly defined, mutually conditioning functionings.

Previously I have suggested a lack of adaptation in the free economies to the requirements of the pure cycle.  What that lack is can now be stated.  It is an inability to distinguish between the significanceof a relative and an absolute rise or fall of monetary prices.  A relative (i.e. “real”) rise or fall is, indeed, a signal for a relatively increased or reduced production (of one product relative to another) … Inversely, the rising prices of the surplus expansion are not real and relative but only monetary and absolute rising prices; to allow them to stimulate production is to convert the surplus expansion (of the ideal pure cycle) into a (trade cycleof) boom (which must be followed out of systematic necessity by a correlative and devastating slump).  This I believe is the fundamental lack of adaptation to the productive cycle that our economies have to overcome. [CWL15, 139-140]

When intelligence is a blank, the first law of nature takes over: self-preservation.  It is not primarily greed but frantic efforts at self-preservation that turn the recession into a depression, and the depression into a crash. [CWL 15, 82]

Frish’s failure to develop a significant theory typifies the failure of economists who search for a dynamic heuristic.  As well as a fundamental disorientation of approach there is also a tendency to shift to an inadequate level of abstraction with a premature introduction of boundary conditions in a determinate set of differential and difference equations. [McShane, 1980, 114]

On such a methodological model (i.e. implicit definition of explanatory conjugates superseding nominal definition)… classes of payments (correlated with classes of production functioniungs) quickly become rates of payment standing in the mutual conditioning of a circulation; … and from the foregoing dynamic configuration of conditions during a limited interval of time, there is deduced a catalogue of possible types of change in the configuration over a series of intervals. There results a closely knit frame of reference that can envisage any total movement of an economy as a function of variations in rates of payment, and that can currently define the conditions of desirable movements as well as deduce the causes of breakdowns.  Through such a frame of reference one can see and express the mechanism to which classical precepts are only partially adapted; and through it again one can infer the fuller adaptation that has to be attained. [CWL 21, 111]

A rigidly egalitarian system belongs to a perfectly egalitarian world; (however,) a world in which men are, in fact, unequal must find a different system.  What system? If the idealism is sentiment without intelligence, it is as likely as not to mate with the underground cynicism of the revolutionaries to foist upon us a dictatorship of the proletariat in which the proletariat does not dictate, (or) a dictatorship of the Herrenvolk in which the Volk obeys the Fuhrer. But if that idealism can be brought to learn the discipline of logic and of scientific reflection, then it will impose a generalization of the exchange economy.  To determine the nature of such a generalization is the aim of this inquiry; but at once this is at least evident. The vast forces of human benevolence can no longer be left to tumble down the Niagara of fine sentiments and noble dreams.  They have to be assigned a function and harnessed within the exchange system, for in no other way can that system shake off its fictitious fetters to move consistently towards its maximum. [CWL 21, 36]

Now the movement from a less to a more general level of thought normally involves not only an enlargement but also a readaptation of the whole existing structure.  A more profound viewpoint emerges, and this calls for a readjustment of the less general correlations. [CWL 21, 6]

it is only to give an account of enormous facts overlooked by political economy and by specialized economics that this generalization is undertaken; and it is only by a new study of facts, more fully grasped because more broadly seen, that our general conclusions can be made a source of practical applications. [CWL 21, 10]

Lonergan provides the systematics of lamentable but preventable crises in CWL 15, 156-62:

until the position of the strong1is undermined by the general and prolonged contracting, the requirement2for the rate of losses continues, and with it the depression. … [CWL 15, 155-56]

This boom suffers no restrictions from a limited potential for short-term acceleration since both stages are now expanding in long-term style.  Both acceleration factors can mount to maxima and remain at the summits with da’ and da” both zero.  Further variations of the price spread thus depend exclusively upon dR, and this becomes negative as the surplus expansion gives place to a basic expansion.  When the prices begin to fall to effect the continual reduction of the price spread, there follows sooner or later the final crash.  Speculative embarrassment makes both da’ and da” negative, to augment the rate of contraction of the price spread and intensify the embarrassment. Assets are frozen and then liquidated in a great drop of prices.  Worse, there is no recovery; for the remainder of the cycle should be a basic expansion which our ill-adapted economies transform into a depression. [CWL 15, 161]

Larry states that “the arguments that Gennaioli and Shliefer make need to be debated in the profession.” Let us suggest that, before Larry calls for debates among macroeconomists about the obvious inadequacy of present foundations, the entire macroeconomics profession must study carefully Bernard Lonergan’s Macroeconomic Dynamics.  That book has already brought insights from mathematics, physics, and scientific method to the discovery of a radically new foundation. Also, let us advise them how not to react in their reading.  Initially they will find Lonergan’s Functional Macroeconomic Dynamics radically different from the static Walrasian structures they have long espoused and depended upon; they might be inclined gradually to rationalize against its method and tenets; then, instead of embracing it, they might seek arguments to defend themselves against it; finally, having mistakenly persuaded themselves that it as a waste of their precious time, they might put it aside. However, if they courageously and carefully power through Lonergan’s dynamics 3-5 times, they will find themselves saying, “Whoa!  Bernard Lonergan operated from a more profound point of view and discovered a deeper unity in macroeconomics.  With his understanding of what constitutes science and explanation and with his employment of the technique of implicit definition, this polymath has successfully applied his expertise in math, physics, and scientific method to discover a new field theory of macroeconomics, a new paradigm, a whole new theoretical combination of foundation and superstructure which explains both the normative equilibria and maladaptive disequilibria of the intrinsically cyclical, dynamic economic process. This is a Copernican revolution.” Then, rather than calling for debates, let Larry call for elucidation, elaboration and implementation of Functional Macroeconomic Dynamics at the Bureau of Economic Analysis, the Federal Reserve Board, textbook publishers, colleges, and universities.

And, once more,

our inquiry differs radically from traditional economics, in which the ultimate premises are not production and exchange but rather exchange and self-interest, or later, exchange and a vaguely defined psychological situation.  Our aim is to prescind from human psychology that, in the first place, we may define the objective situation with which man has to deal, and, in the second place, define the psychological attitude that has to be adopted if man is to deal successfully with economic problems.  Thus something of a Copernican revolution is attempted: instead of taking man as he is or as he may be thought to be and from that deducing what economic phenomena are going to be, we take the exchange process in its greatest generality and attempt to deduce the human adaptations necessary for survival. CWL 21,42- 43

Now as the statistical approach differs from the descriptive, the analytic differs from both.  Out of endless classificatory possibilities it selects not the one sanctioned by ordinary speech nor again the one sanctioned by facility of measurement but the one that most rapidly yields terms which can be defined by the functional interrelations in which they stand. CWL 21, 112

Larry states, “Those wanting to be in the vanguard of the new thinking should be reading “A Crisis of Beliefs.”

We reply, “Those wanting to be in the vanguard of the implementation of a Copernicam revolution in the foundations of macroeconomic theory should be reading Macroeconomic Dynamics: An Essay in Circulation Analysis.  Bernard Lonergan adopted a more profound point of view and employed the technique of implicit definition, and like Newton and Hamilton and Hilbert, and Einstein in their times and fields, discovered a deeper unity.”

[1]The threefold process consisting of 1) a basic process, 2) a surplus process, and 3) a money-infusion process is not to be confused in any way with the three types of production products and correlated incomes: 1) basic products and incomes, 2) ordinary surplus products and incomes, and 3) pure surplus products and incomes.

[2]F = gm1m2/d2

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