Are We Outside Or Inside The Economic Process? And What Constitutes The Equilibrium To Be Achieved?

Our inquiry differs from classical analysis and from traditional economics.  Functional Macroeconomic Dynamics prescinds from human psychology to replace Walras’ general equilibrium with a prior and more fundamental equilibrium to which human participants must adapt.

Participants are not to dominate as willy-nilly, ignorant, external, efficient causes, but rather to adapt to the immanent intelligibility of the objective mechanism.  This immanent intelligibility is the set of laws explaining the process – laws not to be enforced by a civilian police force but rather abstract laws to be understood and honored by enlightened free people.

… rational control of the economy ‘can be democratic only in the measure in which economic science succeeds in uttering not counsel to rulers but precepts to mankind, not specific remedies and plans to increase the power of bureaucracies, but universal laws which men themselves administrate in the personal conduct of their lives.’ [CWL 15, Editors’ Introduction, lxxi]

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 situationOur 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]

I have spoken of the analysis revealing channels and bringing to light an undertow.  My meaning may become clearer by referring to the distinction sometimes made between general equilibrium (Walras, Wicksell) and partial equilibrium (Marshall).  The channels of circulation (of monetary aggregates) replace the overall dominance claimed for general equilibrium theory, but they reveal the condition under which partial equilibrium can exist. … More positively, the channels account for booms and slumps, for inflation and deflation, for changed rates of profit, for the attraction found in a favorable balance of trade, the relief given by deficit spending, and the variant provided by multinational corporations and their opposition to the welfare state.  [CWL 15, 17]

Again, our inquiry differs from classical analysis and from traditional economics. Classical analysis attributes ultimacy to the pricing system, and it confuses “inside” and “outside.”

On classical analysis economic mechanism is the pricing system.  It coordinates spontaneously a vast and ever shifting manifold of otherwise independent choices of demand and decisions of supply.  But man does not stand outside this machine; he is part of it; his choices and decisions are themselves the variables in the system.  It follows that there is no possibility of setting down methodically, on the one hand, the exigencies of the machine and, on the other, the consequent performance of man. [CWL 21, 109]

Schumpeter acknowledged that dynamic analysis called for a new light on equilibrium.  Such new light arises when, over and above, the (microeconomic) equilibria  of supply and demand with respect to goods and services, there are recognized further equilibria that have to be maintained…..Moreover, such macroequilibria are more fundamental than the microequilibria assembled by Walras.  The (macroeconomic equilibria) are the conditions of a properly functioning economy [CWL 15, 92]

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]

……….Lonergan’s interest in Kaldor’s sweeping statement was to emphasize that prices and their changes are not explanatory but accountants’ entities.  For a first approximation of what Lonergan means here, let us draw an analogy to empirical scientific inquiry.  The physicist’s antecedent job of measuring and plotting measurements on graphs in physical science might be compared to tracing movements of prices as the exchange economy ebbs and flows.  What Lonergan has called ‘grasping in the scattered points the possibility of a smooth curve,’ or determining an indeterminate function in physics, would then be comparable to working out an economic theory that specifies the channels through which money circulates. Lonergan insists that the mechanism of the pricing system does not furnish economists with distinctions among significant variables of aggregate surplus (or point-to-line-goods) and basic (or point-to-point-goods) supply and demand with their determinate yet flexible velocities and accelerations, any more than Galileo Galilei’s discrete measurements of distances and times at the Tower of Pisa of themselves provided the law of the acceleration of falling bodies…….the lack of ultimacy that Lonergan ascribes to prices and price theory can scarcely be overemphasized. [CWL 15, Editors’ Introduction xlvi-xlvi]

Gennaioli  and Shleifer’s, A Crisis of Beliefs , Investor Psychology and Financial Fragility, [Gennaioli and Shleifer 2018],  posits economics as a science of human psychology, a science of the psychology of participants, a science of detection of irrationality.  But the psychological human participants are, as it were, outside the process, not Gennaioli  and Shleifer’s formal cause.  They are, as it were, the external efficient causes in the implementation of equilibrium, not the formal cause or immanent intelligibility of the process.  To be sure, human actions cause the flows to be what they happen to be.  But human choices and decisions effecting booms, slumps and associated human misery do not constitute the prior and more fundamental normative, immanent intelligibility to which humans must adapt.

Again: Schumpeter acknowledged that dynamic analysis called for a new light on equilibrium.  Such new light arises when, over and above, the (microeconomic) equilibria  of supply and demand with respect to goods and services, there are recognized further equilibria that have to be maintained…..Moreover, such macroequilibriaare more fundamental than the microequilibria assembled by Walras.  The (macroeconomic equilibria) are the conditions of a properly functioning economy [CWL 15, 92]

Compare the driver of the automobile driving the auto into a ditch with the participants in the economic process driving the process off course into booms, slumps, inflation, and deflation.

A study of the mechanics of motor-cars yields premises for a criticism of drivers, precisely because the motor-cars, as distinct from the drivers, have laws of their own which drivers must respect.  But if the mechanics of motors included, in a single piece, the anthropology of drivers, criticism could be no more than haphazard. [CWL 21, 109]

Macroeconomics is not a matter primarily of psychology, sociology, or anthropology.  The science of macroeconomics is, first of all, a matter of understanding the laws of the mechanism.  But if the mechanism of macroeconomics included, in a single piece, the psychology, sociology, and anthropology of its participants, criticism could be no more than haphazard.

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]

University professors of macroeconomics have a great obligation.

The idea of engineering human welfare is repugnant to Lonergan, for ‘managing people is not treating them as persons. To treat them as persons one must know and one must invite them to know.’ Making the survival of democracy possible by ‘effectively augmenting the enlightenment of … enlightened self-interest’ cannot be identified merely with the Enlightenment’s project of steering public opinion from unenlightened to enlightened self-interest. Instead, Lonergan envisaged a vast and long-term educational effort. He insisted that rational control of the economy ‘can be democratic only in the measure in which economic science succeeds in uttering not counsel to rulers but precepts to mankind, not specific remedies and plans to increase the power of bureaucracies, but universal laws which men themselves administrate in the personal conduct of their lives.’ [CWL 15, Editors’ Introduction, lxxi]

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]

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