The Simple Move to Two Explanatory Circuits; New Foundations of a Scientific Dynamics; NIPA’s GDP Replaced by FMD’s GDFF

Lonergan’s two-circuit diagram (below) represents a theoretical breakthrough.  It replaces the single-circuit diagram common to the textbooks of macroeconomics.

Lonergan started with a dominant one-flow economic analysis –  think in terms of the household-firm diagram  –  and separated it into two flows “to form a more basic concept and develop a more general theory.” 21 …The distinction was never built scientifically (by other economists) into a systematics of dynamic economics [McShane, 2017, viii; ftnt 22]

Academic economists have missed it.

The entire tradition slipped past Lonergan’s simple move.  I describe the move as paralleling Newton’s move. Newton started within an old culture of two flows: an earthly flow and, to recall ancient searchings, a quintessential flow.  Newton went from two to one.  Lonergan started with a dominant one-flow economic analysis  and separated it into two flows “to form a more basic concept and develop a more general theory.” 21 [McShane 2017, viii]; also see {CWL 21, 11}

We show diagrams of rates of flow, i.e. diagrams of interdependent velocities, i.e. diagrams of a two-circuited dynamics.

The textbooks’ Walrasian intersection of supply and demand curves – without time subscripts – is exact, but it is not complete.

Leon Walras developed the conception of the markets as exchange equilibria. Concentrate all markets into a single hall. Place entrepreneurs behind a central counter.  Let all agents of supply offer their services, and the same individuals, as purchasers, state their demands.  Then the function of the entrepreneur is to find the equilibrium between these demands and potential supply. … The conception is exact, but it is not complete.  It follows from the idea of exchange, but it does not take into account the phases of the productive rhythms. … [CWL 21, 51-52]

Lonergan held the diagram to have both explanatory and heuristic significance.  … , the later versions of the Essay in Circulation Analysis text draw ever-greater attention to the fact that 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. … 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]

The development of economic dynamics within the present perspective will have its clusters of differential equations and probability functions.  [McShane, 2002-2, 68]

The economic process is a process of velocities – so much or so many every so often –  and velocities and accelerations are expressed as differential equations.  Thus, some of our core equations regarding velocities and accelerations of the process and changes of key ratios:

  • dI’ =  Σ(widn+ nidw+ dnidwi)yi [CWL 15, 134] The differential equation specifying how to adjust of the rate of saving to the requirements for consumption vs. investment of the productive phase
  • d(P’Q’) = d(p’a’Q’)Basic + d(p”a”Q”)OrdinarySurplus [CWL 15, 157-58] Differentials giving acceleration of expended incomes (P’Q’) and “macroeconomic costs” (p’a’Q’)Basic + (p”a”Q”)
  • δJ = δa’ + a”δR + Rδa” [CWL 15, 160] The differentials of the basic price-spread ratio defining pricings’ relations to quantities
  • d(ΠΚPurely expansionary= d( π”a”ΚPurely expansionary) Differentials of the acceleration of investment
  • δf = vδw + wδv [CWL 15, 148-49] The differentials of the behavior of the pure-surplus-income ratio
  • d(ΣFi)= d(vI”) [CWL 15, 150] The differentials of the acceleration of pure surplus income
  • M’ = (S’ – s’O’) + (D’ – s’I’) + G [CWL 15, 51] The velocity of the addition of money to the basic circuit
  • ΔM’ = (S’-s’O’) = ΔT’ = (O’-R’) + ΔR’[CWL 15, 67] How much money, i.e. monetary circulating capital, is needed by the basic circuit
  • Σdsi= Σridvi [CWL 21, 140] Increments in monetary circulating capital devoted to transitional payments

The happenstantial prices and quantities in a coincidental, productio-temporal, pretio-quantital manifold do not constitute precise analytical, explanatory distinctions upon which an explanation of the economic process may be constructed. Rather than being explanatory, prices and quantities require explanation within an explanatory theory.  They are not first in the analysis forming the analytical foundation, rather they are last in the analysis and defined as constituents of analytically foundational, interdependent, explanatory flows.  And it is the relations among the interdependent velocitous flows that constitute the absolutes upon which the explanation of movements of pretio-quantital flows is to be constructed.

Also see Revision of the NIPA into explanatory form:

In addition to the core differential principles above, we cite other Principles and Theorems of the double-circuited, credit-centered process:

  • Principle of Integral Composition- q= ΣΣqijk  ,  Q= ΣΣQijk  , p= ΣΣpijk, ,  P= ΣΣPijk [CWL 15, 30]
  • Principle of lagged technical acceleration – kn[f’n(t-a)-Bn] = f”n-1(t) – An-1[CWL 15, 37]
  • Principle of Concomitance – elements in a circuit of circular conditioning must keep pace
  • Principle of Equilibrium Between Two Circuits – G = c”O” – i’O’ = 0 [CWL 15, 54]
  • Provisional Theorem of Continuity – final sales in successive intervals of a stable process must be equal
  • General Theorem of Continuity Within Constraints

Continuity is the maintenance of organization, the stability of the sets and patterns of dynamic relationships that constitute economic well-being in a society.[CWL 21, 74]

Now the general theorem of continuity is that this (organic whole) has a nature that must be respected. … to violate this organic interconnection is simply to smash the organism, to create the paradoxical situation of starvation in the midst of plenty, of workers eager for work and capable of finding none, of investors looking for opportunities to invest and being given no outlet, and of everyone’s inability to do what he wishes to do being the cause of everyone’s inability to remedy the situation.  Such is disorganization.  Continuity, on the other hand, is the maintenance of organization, the stability of the sets and patterns of dynamic relationships that constitute economic well-being in a society. [CWL 21, 74]

  • Theorem of “macroeconomic Costs”, or the Principle of Reciprocity – P’Q’ is reciprocal to (p’a’Q’ + p”a”Q”)

There is a sense in which one may speak of the fraction of basic outlay that moves to basic income as the “costs” of basic production. It is true that that sense is not at all an accountant’s sense of costs; … But however remote from the accountant’s meaning of the term “costs,” it remains that there is an aggregate and functional sense in which the fraction… is an index of costs.  For the greater the fraction that basic income is of total income (or total outlay), the less the remainder which constitutes the aggregate possibility of profit.  But what limits profit may be termed costs. Hence we propose ….to speak of c’O’ and c”O” as costs of production, having warned the reader that the costs in question are aggregate and functional costs…. [CWL 15 156-57]

  • The Principle of the Normative proportion and The Crossover Ratio – Honor the technical and financial constraints of the process. Do not overinvest.  Do not overborrow. Do not overlend.

Once again: Academic economists have missed it.

The entire tradition slipped past Lonergan’s simple move.  I describe the move as paralleling Newton’s move. Newton started within an old culture of two flows: an earthly flow and, to recall ancient searchings, a quintessential flow.  Newton went from two to one.  Lonergan started with a dominant one-flow economic analysis  and separated it into two flows “to form a more basic concept and develop a more general theory.” 21 [McShane 2017, viii]; also see {CWL 21, 11}


 

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