The process is always the current, purely dynamic process. The analysis is purely functional, purely relational and explanatory analysis. The theory is general and universally applicable to concrete determinations in any Instance; The theory is a normative theory having a condition of equilibrium.
Our subheadings in this treatment are as follows:
- Always the Current Process:
- A Purely Dynamic Process Requiring a Dynamic Heuristic:
- A Purely Functional Analysis:
- A Purely Relational, Explanatory Analysis:
- A Theory, General and Universally Applicable to Concrete Determinations in Any Instance:
- A Normative Theory Having a Condition of Equilibrium:
Always the Current Process:
The economic process is always the current process. It has evolved to the present and it will continue to evolve on into the future; but the analyst is concerned with the governing principles, laws, and primary relativities applicable to the current process; his theory is to be general, universally applicable, and explanatory of any configuration at any instance. Just as the swing of the ideal simple pendulum or just as the purely elliptical orbit of a massive body has a primary relativity that is general, explanatory and universally applicable to any configuration of the variables at any instance, so Lonergan’s Functional Macroeconomic Dynamics deals in the same way with all macroeconomic phenomena and is general, universally applicable, and explanatory of any configuration of the variables at any instance.
The productive process is, then, the (current) aggregate of activities proceeding from the potentialities of nature and terminating in a standard of living. Always it is the current process, and so it is distinguished both from the natural resources, which it presupposes, and from the durable effects of past production. [CWL: 15, 20]
The current process is constituted by interdependent, mutually conditioning flows of productive contributions and payments of money. As flows, these constituents are velocities; and thus the explanatory terms will be velocities or rates of activity.
(It is a fact that) the current process is always a rate of activity, that this rate of activity differs from the potentialities of nature, from which it proceeds, and that it differs from its finished products, which, ex hypothesi, are no longer in process but already produced. … Goods that have been completed are not goods in process; services that have been rendered are not services being rendered. Again, goods in process are not the natural resources from which they are derived; and services being rendered are not the natural potentialities from which they are derived. There can be resources and potentialities without goods or services being derived from them.; and while they are in process of being derived, the goods are not yet produced and the services not yet rendered. … Thus the productive process is a purely dynamic entity. [CWL 15, 21]
The analyst seeks to discover the primary dynamical relativities which can be applied to the current co-incidental secondary determinations of prices and quantities to explain the process in a standard interval . Just as, for the determination of the actual current location and velocity of a body moving in an elliptical orbit, it would be necessary to apply the primary explanatory relativities of elliptical motion to secondary measurements of initial position and initial velocity, so, the macroeconomist seeks first to make precise analytical distinctions among terms of explanatory significance, then discover the primary relationships among the terms, and, then, apply these primary relativities to the secondary measurements in the non-systematic manifold, so as to explain the current, concrete process.
Paraphrasing [McShane, 1980, 127]: Taking into account past and (expected) future values does not constitute the creative key transition to Functional Macroeconomic Dynamics. Those familiar with elementary statics and dynamics (in physical mechanics) will appreciate the shift in thinking involved in passing from (static) equilibrium analysis (of, say, a suspended weight with subscripts for time not needed, or of a static equilibrium of supply and demand within and between circuits)…to an analysis (of, say, the motions of planets or pendula) where attention is focused on second-order differential equations, on d2θ/dt2, d2x/dt2, d2y/dt2, on the primary relativities of a range of related forces, central, friction, whatever. Particular secondary boundary conditions in Functional Macroeconomic Dynamics, (such as) past and future pricings and quantities (analogous to a particular planet’s particular past or future angular position, velocity, acceleration), are relatively insignificant for the analysis of the primary relativity immanent in, and applicable to, every instance of the process. What is significant is the Leibnitz-Newtonian shift of context.
Lonergan dealt in the same way with all macroeconomic phenomena. He did so by turning to a field of greater generality, the field theory of macroeconomic phenomena, and by finding a deeper unity at a more adequate level of abstraction in the apparent disparateness of neoclassicism, Keynesianism, monetarism, and behaviorism. Lonergan went beyond the schools and isms by employing implicit definition, precise analytical distinctions at an adequate level of abstraction, and functional analysis.
It is … a scientific generalization of the old political economy and of modern economics that will (sublate and transform the isms and) and yield the new political economy which we need. … Plainly the way out is through a more general field. [CWL 21, 7]
Prices and quantities in the current process are secondary determinations in a non-systematic manifold, not primary magnitudes of universal, scientific significance at an adequate level of abstraction.
A Purely Dynamic Process Requiring a Dynamic Heuristic:
Lonergan agreed with Schumpeter that … to be able to explain the booms, slumps, and crashes of the trade or business cycles the economist’s analysis had to be as dynamic as the subject matter under investigation; and he agreed that the economist had to know what are the significant (functional) variables in the light of which price changes are to be interpreted. According to Lonergan, standard economic theory had successfully achieved none of these desiderata. [CWL 15, Editors’ Introduction liii]
(It is a fact that) the current process is always a rate of activity, that this rate of activity differs from the potentialities of nature, from which it proceeds, and that it differs from its finished products, which, ex hypothesi, are no longer in process but already produced. No doubt the three are closely related, but relation presupposes distinction, and before relations can be grasped adequately, the distinctions must be grasped. Goods that have been completed are not goods in process; services that have been rendered are not services being rendered. Again, goods in process are not the natural resources from which they are derived; and services being rendered are not the natural potentialities from which they are derived. There can be resources and potentialities without goods or services being derived from them.; and while they are in process of being derived, the goods are not yet produced and the services not yet rendered. … Thus the productive process is a purely dynamic entity. [CWL 15, 21]
Thus the productive process is a purely dynamic entity. We began by saying how broadly the term was to be taken. But it is also necessary to insist how narrowly. It is not wealth, but wealth in process. … It is none of its own effects, if by effects are understood what has been completed. It is neither the existence nor the use of durable consumer goods, of clothing, houses, furnishings, domestic utensils, personal belongings, or indeed any item of private or public property that can be listed as a consumer good and has passed beyond the process to become an element of the community’s standard of living. On the other hand, with regard to producer goods a distinction has to be drawn: they are in the process as a means of production; they are in the process in the sense that labor is in the process or that management is in the process, namely, their use forms part of the process; but once they are completed they are no longer under process, any more than labor or management is under process and being produced. … factories and machinery, railways and power units, warehouses and offices are in the productive process only while being produced; once they are produced, they themselves have passed beyond the process to enter the category of static wealth, even though their use remains a factor of production. CWL 15, 21-22
The current, purely dynamic process is constituted by the current flows constituting production, exchange, and finance. These velocitous flows are so much or so many every so often; thus they are dynamic, and they are represented mathematically as dQ/dt, or ΔQ/dt, or d2Q/dt2, or ΔQ2/dt2. The scientific and dynamic heuristic of the analyst mandates complete explanation of the dynamic process in terms of the velocities and changes in velocities of the interdependent, functional, constituents of the process.
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]
One might be reminded here of a parallel in hydrodynamics: if what is at issue is a general specification of the dynamics of free water waves, a premature introduction of general boundary conditions or worse, specific channel conditions, botches the analytic possibilities….the Robinson-Eatwell analysis is hampered, not only by an absence of paradigmatic heuristic thinking in a field whose principles involve ends, but also by their building the economic priora quoad nos of profits, wages, prices, etc., into explanation, when in fact the priora quoad nos are last in analysis: they require explanation.[McShane 1980, 124]
A Purely Functional Analysis:
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 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]
“Functional” is for Lonergan a technical term pertaining to the realm of explanation, analysis, theory; it does not mean “who does what” in some commonsense realm of activity. … Lonergan illustrates his basic meaning of ‘explanation’ by referring to D. Hilbert’s method of implicit definition: Let us say, then, that for every basic insight there is a circle of terms and relations, such that the terms fix the relations, the relations fix the terms, and the insight fixes both. Thus the meaning of both point and straight line is fixed by the relation that two and only two points determine a straight line. … Lonergan went on to identify 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 3, 37-38/61-62)…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]
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]
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.
(Again:) … the terms fix the relations, the relations fix the terms, and the insight fixes both. Thus the meaning of both point and straight line is fixed by the relation that two and only two points determine a straight line.
“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]
I have insisted on focusing on the central issue: the need of a functional analysis of the productive process and its correlated monetary flow. [McShane 1980,200]
The explanatory theory must not be contaminated by sociological, political, proprietary, or material categories; nor by a premature introduction of boundary conditions such as prices and quantities.
The division is not a matter of social relations or of property or of the properties of things: it is a functional analysis. … The aim of the analysis is to reveal the possibilities of the productive process as a dynamic system. [McShane 1980, 119-20]
Now whatever the difficulties of measurement, the functional distinction is undeniably valid. [McShane 1980, 121]
The distinction between basic and surplus is not a material nor a proprietary but a functional distinction. There are types of enterprise that in themselves are indifferently basic or surplus … [CWL 15, 118]
A Purely Relational, Explanatory Analysis:
The scientific and dynamic heuristic mandates that complete explanation of the concrete process will require real analysis. The pattern of flows of dummy money must be identified with the structural dynamics of what money buys. First must be the analysis of the structure of the process of production and sale which the dummy money makes possible. The analysis must be real analysis.
real analysis (is) identifying money with what money buys. … And that is the source of the problem in real analysis. If you want to treat money that doesn’t make a difference, you can have a beautiful liberal monetary theory. But it doesn’t say the way the thing works. [CWL 21, xxviii]
In real analysis money is a dummy invented by man to make possible a vast and intricate process of production and exchange of goods and services.
The whole structure is relational: one cannot conceive the terms without the relations nor the relations without the terms. Both terms and relations constitute a basic framework to be filled out, [CWL 3, 492/516] (In addition, read in the entirety CWL 3, 491-6/514-20)
Lonergan illustrates his basic meaning of ‘explanation’ by referring to D. Hilbert’s method of implicit definition. [CWL 15, 26-27 ftnt 27]
Lonergan is looking for an explanation in which the terms are defined by the relations in which they stand, that is, by a process of implicit definition. This technique (implicit definition) has been used to great effect by David Hilbert in his Foundations of Geometry in which, for example, the meaning of a point and a straight line is fixed by the relation that two, and only two points, determine a line. “The significance of implicit definition is its complete generality. The omission of nominal definition is the omission of a restriction to objects which, in the first instance, one happens to be thinking about. The exclusive use of explanatory or postulational elements concentrates attention upon the set of relationships in which the whole scientific significance is contained.” [Michael Gibbons, Economic Theorizing in Lonergan and Keynes p. 313]
A purely relational explanation, in the form of a field theory, resides in the relations of things to one another. This is in contrast to a) description which states the relations of things to us, e.g. hot, cold, red, orange, near, far, pleasurable, painful, impoverishing, enriching; and b) deduction from absolutes which are assumed to be 1) either too basic to require definition by relation and known as true in and of themselves, or 2) endogenous primary givens from which analysis begins.
Lonergan systematized a macroeconomic field theory rather than a macrostatic theory of efficient causes. Macroeconomics, which relates the interdependencies and interactions among functional flows is a set of intelligible relations linking what is implicitly defined by the relations themselves; it is a set of relational forms. The form of any element is known through its relations to all other elements. The Diagram of Rates of Flow represents this field theory. (Click here and here.)
Functional Macroeconomic Dynamics is a set of relational forms.
again, as to the notion of cause, Newton conceived of his forces as efficient causes, and the modern mechanics drops the notion of force; it gets along perfectly well without it. It thinks in terms of a field theory, the set of relationships between n objects. The field theory is a set of intelligible relations linking what is implicitly defined by the relations themselves; it is a set of relational forms. The form of any element is known through its relations to all other elements. What is a mass? A mass is anything that satisfies the fundamental equations that regard masses. Consequently, when you add a new fundamental equation about mass, as Einstein did when he equated mass with energy, you get a new idea of mass. Field theory is a matter of the immanent intelligibility of the object. [CWL 10, 154]
Paraphrasing: again, as to the notion of cause, macroeconomists mistakenly conceive of subjective preferences as formal causes. Functional Macroeconomic Dynamics drops the notion of subjective preferences; it gets along perfectly well without it. It thinks in terms of a field theory, the set of relationships between n interdependent, implicitly defined, real functional activities. The field theory of Functional Macroeconomic Dynamics is a set of intelligible functional relations linking functionings which are implicitly defined by the relations themselves; it is a set of relational forms. The form of any functioning is known through its relations to all other functionings. …. The field theory of macroeconomics is a matter of the immanent intelligibility of the objective, dynamic functional process.
Lonergan agreed with Schumpeter on the importance of systematic or analytic framework in order to explain, rather than merely record or describe, the aggregate phenomena of macroeconomics; he agreed with Schumpeter that to be able to explain the booms, slumps, and crashes of the trade or business cycles the economist’s analysis had to be as dynamic as the subject matter under investigation; and he agreed that the economist had to know what are the significant variables in the light of which price changes are to be interpreted. According to Lonergan, standard economic theory had successfully achieved none of these desiderata. [CWL 15, Editors’ Introduction liii]
To measure and relate changes in functional monetary flows in the process of production and sale: Let Z stand for the aggregate of functional basic expenditures, P’Q’, for consumer goods; then one may express gross production and monetary flows, aggregates of productive contributions (i.e. application of factors of production) and their compensations, in terms of their macroeconomic components:
- qi= ΣΣqijk ; [factoral composition], [CWL 15, 30]
- Qi= ΣΣQijk ; [factoral composition], [CWL 15, 30]
- Z = Σpiqi ; [for expenditures], [CWL 15, 107-109]
- Z + DZ = Σ(piqi+ pidqi+ qidpi+dpidqi) ; [for expenditures], [CWL 15, 107-109]
- Therefore, Z = Σ(pi)(aqi) ; [for costs], [CWL 15,157-159]
- Z + DZ = Σ(piaqi+ pidaqi+aqidpi+dpidaqi) ; [for costs], [CWL 15,157-159]
- Z = Σpiqi = PQ = PQ cosA ; [CWL 15, 107-109]
- Z + DZ = (P+dP)(Q + dQ) cos(A + dA) ; [CWL 15, 107-109]
- Therefore, Σ(piqi+ pidqi+ qidpi+dpidqi) = (P+dP)(Q + dQ) cos(A + dA) ; [CWL 15, 107-109]
- DZ = PQ[(dP/P + dQ/Q + dPdQ/PQ) cos (A + dA) – 2 sin(dA/2) sin(A + dA/2)] ; [CWL 15, 107-109]
- (See ) [ VNR Encyclopedia, 1977 p. 235; Sums and Differences of Trigonometric functions]
By a set of parallel equations one may express gross productive and monetary flows in the surplus circuit, aggregates of productive contributions and their compensations, in terms of their macroeconomic components
A Theory, General and Universally Applicable to Concrete Determinations in any Instance:
Functional Macroeconomic Dynamics is a theory of equilibria and disequilibria; FMD holds in any number of instances.
General laws contain a primary relativity and are applied to the concrete “only through the addition of further determinations, and such further determinations pertain to a non-systematic manifold. … it is not enough to think about the general law; one has to add further determinations that are contingent from the very fact that they have to be obtained from a non-systematic manifold. [CWL 3, 492/516]
Paraphrasing from several sources: The “formal cause” of the economic process is its immanent intelligibility. The formal cause consists in the primary relativities or general laws of the process , which hold in any number of instances. In the formal cause we apprehend many things as one; we grasp all in a unified view. The formal cause contains the normative theory but explains both equilibria and disequilibria. Particular boundary conditions, such as past and future prices and quantities are relatively insignificant for the analysis; these boundary conditions are further determinations that are contingent from the very fact that they have to be obtained from a non-systematic manifold. (CWL 3, 491-6/)
Paraphrasing [CWL 21, 6-7]: Lonergan dealt in the same way with all macroeconomic phenomena. He did so by turning to a field of greater generality, the field theory of macroeconomic phenomena, and by finding a deeper unity at a more adequate level of abstraction in the apparent disparateness of neoclassicism, Keynesianism, monetarism, and behaviorism. … Lonergan went beyond the schools and isms by employing implicit definition, precise analytical distinctions, and functional analysis. It is Lonergan’s scientific generalization of the old political economy and of modern economics that will sublate and transform the isms and yield the new (sublation) which we need. … Plainly the way out is through a more general field.
- See Lonergan’s Goal
- See Emergence of Science
- See Understanding All in a Unified Whole
- CWL 5, 52, ¶2 and paraphrase
A Normative Theory Having a Condition of Equilibrium:
A systematic explanation, then, requires a normative theoretical framework. The basic terms and relations of such a framework would specify the distinctions and correlations that articulate the causes, which are not necessarily visible, of events that are apparent to all. The framework would thus stand to the ordinary apprehension of the booms and slumps of the trade cycle in much the same way that the explanatory grasp of acceleration as the second derivative of a continuous function of distance and time stands to the ordinary, commonsense grasp of what it is to be going faster. [CWL 15, Editors’ Introduction, lv]
The primary relativities of the systematic explanation supply the norms and precepts for the continuity and equilibrium of the process. As flexible and as involving the boundary values of prices and quantities determined by humans, the norms and precepts can be violated by the human agents. Just as one can drive the automobile into a ditch, so can one and all the human agents misinterpret monetary events, such as pricing of both products and rentals of money, price changes, the flow of incomes for investment, and respond by driving the economic process into stagflation, or into an overexpansionary boom systematically requiring a corrective slump.
In the case of a failure by the government-private-sector-combine to honor the precepts in all distinct phases and, especially, to implement the basic expansion in the basic-expansion phase naturally subsequent to the capital-expansion phase, demand is rendered insufficient and the process contracts in a downward spiral of quantities and prices, characterized by associated contractions, liquidations, and painful unemployment. And, though
The idea of an expansion is not a future contraction. [CWL 21, 104],
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]
In the case of simple overexpansion, colloquially called a boom, there arises a systematic necessity for a correction.
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]
Universally and devastatingly the macroeconomics textbooks conceive the process of production and exchange as a single-circuit of interactions between households and firms with sideline pipes to the banking system and to the government as a false third party.
It is a common saying that savings equals investment. On the present showing it would be more accurate to say that the crossovers should balance, that a sustained lack of balance portends ruin, … [CWL 15, 70]
Need the moral be repeated? There exist two circuits, each with its own final market. The equilibrium of the economic process is conditioned by the balance of the two circuits: each must be allowed the possibility of continuity, of basic outlay yielding an equal basic income and surplus outlay yielding an equal surplus income, of basic and surplus income yielding equal basic and surplus expenditure, and of these grounding equivalent basic and surplus outlay. But what cannot be tolerated, much less sustained, is for one circuit to be drained by the other. [CWL 15, 175]
As the table makes clear, a variation in G’ is much more significant that a variation in G”. … Inversely, when G” is 90% and G’ is really 10% but estimated to be 20% by over-zealous depreciation charges and by depressed wages, then a normative proportion of 9 is given a monetary distribution corresponding to a proportion of 4.5. The result is an overproduction or an insufficient purchasing power or a maldistribution (or whatever it is safe to call it, for superficial economists fancy the thing cannot exist) that generously slices off about half of existing economic activity. We say ‘about half’ for the proportion 4.5 is a relative term: secondary activity may increase, and then the proportion is four-and-a-half times something greater than what it was nine times greater; on the other hand, as eventually will be the case, secondary activity may decrease, and then the proportion becomes 4.5 times something smaller than before [CWL 21 55 (for full explanation of “about half”)]