John Greenwood and Steve H. Hanke’s “The Monetary Bathtub is Overflowing”

In their article in the 10/21/2021 Wall Street Journal,  John Greenwood and Steve H. Hanke evoked an image with which we are all familiar, water flowing into and out of a bathtub.  The simple image was to be representative of monetary flows.  The image attracted attention, which was a good thing; however, Macroeconomic Field Theory finds it more instructive to put forth a more adequate representative image of flows. In FMD’s Diagram of Rates of Flow, the rates are velocities and accelerations of functionally interdependent flows.  Insight into the Diagram yields an enriching explanation of the dynamics of the objective economic process. (Also click here, and here, and here)

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All must acknowledge and concede that G&H’s article had to be written so as to be understandable by the layperson; that being said, we point out the following:

  • The objective economic process consists of two (or more) operative functional monetary circulations in circuits plus an accessible money pool of reserves situated in a “redistributive function.”  The circulations and the pool are functionally defined and have a role in any consideration of the money supply and its circulation.
  • In macroeconomic dynamics, the idea of money held for insurance claims, emergencies, a rainy day, retirement, personal wealth, or investment is better explained mathematically in terms of income strata and their average propensity to consume or invest. (CWL 15, 134 ff.)
  • G&H’s analysis is not explicitly dynamical; it does not explicitly analyze the functional dynamics of the current process and what constitutes continuity and dynamic equilibrium; however, it identifies recent and current flows which are presently intrinsically inflationary, even if it will take time for the actual inflation to work itself out through the supply chains, operative circuits, and stock and bond prices.  Though it takes time for inflation to work through the long supply chain and the resistance of buyers and to sooner or later swindle lenders, savers and vulnerable lower-paid fixed-wage workers, G&H measure and point out clearly enough the inflationary pressure that is implicit in recent government, Treasury, and Fed operations.
  • Also, G&H should emphasize that excess money can result in inflation not only in present goods and services, but also in stocks, bonds, real estate, art, etc.  It all depends on how the money circulates, whether it will be used for projects with beneficial social or financial returns, and whether or not it might finally settle in idleness and without productive motive so as to mistakenly inflate secondary markets.


It is now necessary to state the necessary and sufficient condition of constancy or variation in the exchange value of the dummy.  To this end we compare two flows of the circulation: the real flow of property, goods, and services, and the dummy flow being given and taken in exchange for the real flow….Accordingly, the necessary and sufficient condition of constant value in the dummy lies in its concomitant variation with the real flow. (CWL 21, 38-39)

 … it will be well at once to draw attention to J.A. Schumpeter’s insistence on the merits of the diagram as a tool. (Schumpeter, History 240-43, on the Cantillon-Quesnay tableau.) … First, there is the tremendous simplification it effects.  From millions of exchanges one advances to precise aggregates, relatively few in number, and hence easy to follow up and handle. … Next come the possibilities of advancing to numerical theory.  In this respect, despite profound differences in their respective achievements, the contemporary work of Leontieff may be viewed as a revival of Francois Quesnay’s tableau economique. Most important is the fact that this procedure was the first to make explicit the concept of economic equilibrium.  All science begins from particular correlations, but the key discovery is the interdependence of the whole. …  the diagram (of the interconnections of a few precise aggregates) has compensating features that Quesnay’s system of simultaneous equations may imply but does not manifest. … First there is the tremendous simplification (a diagram) effects. …   ¶ I would add that the aims and limitations of macroeconomics make the use of a diagram particularly helpful, …  For its basic terms are defined by their functional relations.  The maintaining of a standard of living (distinct process 1) is attributed to a basic process, 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 (distinct process 3) are concentrated in a redistributive function, whence may be derived changes in the stock of money 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, 53-4 and 177] 

The channels of Lonergan’s Diagram of Rates of Flow provide a general and universal explanatory framework of the always-current process.  The channels explain– rather than merely describe or postulate – both the dynamic equilibria of the pure cycle and the dynamic disequilibria of the booms and the slumps.

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]

… 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]

Ideally, the dummy money would be constant in exchange value.

.., the dummy must be constant in exchange value, so that equal quantities continue to exchange, in the general case, for equal quantities of goods and services.  The alternative to constant value in the dummy is the alternative of inflation and deflation.  Of these famous twins, inflation swindles those with cash to enrich those with property or debts, while deflation swindles those with property or debts to enrich those with cash; in addition to the swindle each of these twins has his own way of torturing the dynamic flows; deflation gives producers a steady stream of losses; inflation yields a steady stream of gains to give production a drug-like stimulus. [CWL 21, 37-38] 

So that they will gain a better understanding of how the production-and-sale process really works and thereby refine their arguments regarding how the monetary flows must properly conform to the magnitudes and frequencies constituting the dynamic economic process, we encourage Messrs. Greenwood and Hanke to study Bernard Lonergan’s Macroeconomic Field Theory, also called Functional Macroeconomic Dynamics.  In particular, they should master the Diagram’s scheme of functional interdependencies of the productive and monetary velocities and, thereby, gain a tightly-knit framework by which to critique the government and the Fed’s mismanagement of the process. They should bring themselves to understand the Diagram in a Unified Whole and thereby be enabled to instruct re The Good of Order and soar to the top of their professions.  Again,

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. [CWL15, 17]

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 was grateful for the way Schumpeter had shown slumps and crises were related to contraction of plant and equipment, and that there were ‘a hundred theories’ on why – so that in Schumpeter’s estimation there really existed no solid explanation.  Lonergan claimed: ‘I have an explanation on that.’  In addition he said he was grateful to Schumpeter for elucidating the virtualities of Francois Quesnay’s (1694-1774) tableau economique (MD:ECA 53).  Lonergan appreciated the way the tableau (1) allowed the theorist (a) to correlate many things all at once, and not just one at a time, piecemeal; (b) to assign numbers arithmetically to the variables involved; (2) permitted insight into phantasm instead of mere speculation detached from the facts.  (See Joseph A. Schumpeter, History of Economic Analysis 222-23, 241-43.)  Lonergan’s own use of his five-point diagram indicates just how seriously he took the need for adequate diagrams.  (See ‘Appendix History of the diagram, 1944-1998’ below, pp 177-202) [CWL 15, Editors’ Introduction, ftnt 86, liii]

There are sets of phenomena, notably the favorable and unfavorable balances of foreign trade, deficit government spending, and the payment of public debts by taxation, that are analogous to the phenomena of the cycle.  It is proposed to deal with them under the general title of ‘superposed circuits.’  [CWL 15, 162-63]

2 Government Taxes and Spending


In our general account of the monetary circulation, two circuits, a basic and a surplus, were distinguished.  They were interconnected with a crossover.  But they involved no regular flow through the Redistributive Function. … There is, however, no impossibility of the Redistributive Function becoming a point through which a circuit regularly passes …  On the other hand, such a circuit both presupposes and is distinct from the basic and surplus circuits already considered.  Hence the name of superposed circuits, and also the mode of treatment.  [CWL 15, 162-63]

No doubt the additions or subtractions (of the superposed circuits) modify these rates (in the fundamental operative circuits already considered, and) reinforce or counteract the tendencies of whatever phase may be in progress.  Our purpose in representing them as (superposed circuits) is not at all to deny such interaction but rather to gain a viewpoint from which such interaction may be studied.  The viewpoint adopted is that of the circuit. CWL 15, 162-63

See also in CWL 15:

  • Figure 24-6, Growth of Rate of Basic Production (Q’) Over a Pure Cycle
  • Figure 24-7, Rate of Change of dQ’/Q’ and dQ”/Q” over a Pure Cycle
  • Figure 27-1 Rate of Change of v, w, and f during a Pure Cycle, Ideal Maximum f
  • Figure 29-1 Diagram of Superposed Circuits
  • Figure 31-1 Diagram of Government Sending and Taxes

Mr. Greenwood is chief economist at Invesco in London.  Mr. Hanke is professor of applied economics at Johns Hopkins University.


3 thoughts on “John Greenwood and Steve H. Hanke’s “The Monetary Bathtub is Overflowing”

  1. John Raymaker

    Does this article mean that two reputed economists, Greenwood and Hanke, have found and applied Lonergan’s method in CWL 15, 21? If so, this is a needed breathrough.

  2. jaraymaker

    Pierre Whalon and myself, John Raymaker, jaraymaker@aol. com, are writing a book titled Towards Healing our AILING Economic Systems: Bernard Lonergan’s Economics as an Ethical Alternative to Adam Smith, Karl Marx and Keynesian Economics We would much appreciate any comments if you would agree to read-peruse our MS which is in its final stages, John


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