The 3/7/2022 Wall Street Journal featured an article by Jason Furman entitled “Bad News About the Good Inflation News”.
Mr. Furman used traditional microeconomics to address the problem of production (SUPPLY) cost prices, exchange (DEMAND) selling prices, aggregate marginal productivity (SUPPLY) of income-earning returning workers, aggregate marginal expenditures (DEMAND) of productive returning workers. He addressed the implications for inflation of consumers deciding to purchase fewer goods but more services.
Functional Macroeconomic Dynamics’ “ Statement of Composition” – whether what is composed is a good or a service – is
qi = ΣΣqijk (for context see CWL 15, 30)
where the individual final product, qi , is comprised of a double summation of velocitous application of the factors of production, k, over the value-adding units of enterprise, j. (The equals sign does not connect identical units of measure, and it is, thus, a symbol of composition of components.)
The total flow of individual products – of so much or so many every so often – may be represented as Qi , where Qi = ΣΣQijk; that is the productive process is a velocitous process of flows of composite goods and services made up of component factors applied at velocities of so much or so many per interval.
On pages 65-8 of CWL 15 Lonergan gives a treatment of the microeconomics of initial, transitional, and final payments at the units-of-enterprise level; then the microeconomic elements are subsumed into and expressed as aggregate explanatory elements of the macroeconomic process.
After treating the intelligibility of
- the structure of the productive process
- exchange of products for money
- the amount of money required for finance; i.e. the magnitudes and frequencies of operative transactions
- the Pure Cycle of Expansion of the productive process
- the Cycle of Basic Income as the economic process expands in phases
- the Cycle of Pure Surplus Income – its normative rate of increase to a maximum and its return to zero
- the mistaken turning of an explanatory pure cycle of expansion, having no necessity of decline, into a so-called “trade cycle” or “business cycle” explained as a deviant boom and slump
Lonergan treats the intelligibility of The Cycle of the Aggregate Basic Price Spread (CWL 15, 156-62).
He refers to the functionally related explanatory flows of the Diagram of Rates of Flow.
Insert Diagram of Rates of Flow
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’ = p’a’Q’) and (c”O” = p”a”Q”) as costs of production, having warned the reader that the costs in question are aggregate and functional costs…. [CWL 15, 156-57]
P’Q’ = p’a’q’ + p”a”q” (CWL 15, 156-62)
P/p = a’ + a”R (CWL 15, 156-62)
J = a’ + a”R (CWL 15, 156-62)
dJ = da’ + a”dR + R da (CWL 15, 156-62)
In the above equations we should think of Q’ as the total flow of components, Qijk, formed into integral composite vendable aggregates where component factors in the integrals are a’Q’ and a”Q”. And the total exchanged flow (“outflow”) of completed products Qi is in concomitance and correspondence with the total “inflow” of the components which constitute those products. And P’, p’, and p” are prices, so that we have an abstract explanatory formulation of exchange revenues P’Q’ in a concomitance of circulation with basic costs, a’Q’ and a”Q”. Thus Outlays equal Incomes equal Expenditures equal Receipts.
A condition of circuit acceleration was seen in section 15 to include the keeping in step of basic outlay, basic income, and basic expenditure, and on the other hand, the keeping in step of surplus outlay, surplus income, and surplus expenditure. Any of these rates may begin to vary independently of the others, and adjustment of the others may lag. But any systematic divergence brings automatic correctives to work. The concomitance of outlay and expenditure follows from the interaction of supply and demand. The concomitance of income with outlay and expenditure is identical with the adjustment of the rate of saving to the requirements of the productive process. [CWL 15, 144]
- R’ = E’ (CWL 15, 54)
- R” = E” (CWL 15, 54)
- I’ = O’ +M’ (CWL 15, 54)
- I” = O” +M” (CWL 15, 54)
- G = c”O” –i’O’ (CWL 15, 54)
- G = c”O” –i’O’ = 0 the condition of dynamic equilibrium (CWL 16, 50)
- M’ = (S’ – s’O’) + (D’ – s’I’) + G (CWL 15, 54)
- M” = (S” – s”O”) + (D” – s”I”) – G (CWL 15, 54)
- (S’-s’O’) = ΔT’ + (O’ – R’) + ΔR’ (CWL 16, 67)
- (S”- s”O”) = ΔT” + (O” – R”) + ΔR” (CWL 16, 67)
Thus for example, assuming G = 0, and by the principle of concomitance and by the functional role of credit to bridge time gaps, we have for the basic circuit the relations of functional flows among themselves:
- R’ = E’ = I’ = O’ +M’
- R’ = E’ = I’ = O’ +[S’ – s’O’] + [D’ – s’I’]
- R’ = E’ = I’ = O’ + [ΔT’ + (O’ – R’) + ΔR’] + [D’ – s’I’]
One can develop parallel equations for the surplus circuit, and then combine both circuits to calculate Gross Domestic Functional Flows, GDFF, to replace Gross domestic Product, GDP, as the primary reference for management of the economy.
The analysis has become an analysis of pretio-quantital monetary flows – P’ times Q’, p’ times a’Q’, and p” times a”Q”. It has become “circulation analysis,” and thus the subtitle of CWL 15, “An Essay in Circulation Analysis.” Further, prices and quantities are each understood in the context of the flows. As Einstein redefined space and time as relativistic spatio-temporality rather than as separate containers, so Lonergan redefines price and quantity as the pretio-quantitality of explanatory flows rather than as the external givens of disoriented textbook macroeconomics. (See in “Truth and Verification in Functional Macroeconomic Dynamics” the section on … Under review)
J, Furman’s distinction between goods and services is superficial; both goods and services are merely composites of the fundamental, velocitous applications of the factors of production in the process of production and exchange. The distinction is reduced into the simpler identification of the point-to-point correspondence of Outlaid pretio-quantital input components to Expended and purchased pretio-quantital output composites. The distinction between goods and services is a distinction without any useful explanatory difference. One may focus on shifts or substitutions from one descriptive classification to another – goods to services – or particular subclasses to another – particular subservice to particular subservice – but in the aggregate one cannot escape the precise analytic distinction of point-to-point vs.point-to-line activities, where point-to-point includes goods and services indifferently.
… the exchange solution is a dynamic equilibrium resting on the equilibria of markets. … every product of the exchange economy must mate through exchange with some other product, and the ratio in which the two mate is the exchange value. The generality of this equilibrium makes it indifferent to endless complexity and endless change; for it stands on a level above all particular products and all particular modes of production. While these multiply and vary indefinitely, the general equilibrium of the exchange process continues to answer with precision the complex question, Who, among millions of persons, does what, among millions of tasks, in return for which, among millions of rewards? Nor is the dynamic solution unaccompanied by a continuous stimulus to better efforts and more delicate ingenuity. For the uniformity of prices means that the least efficient of those actually producing will at least subsist, while every step above the minimum efficiency yields a proportionately greater return.. (CWL 21, 34-35)
The question thus becomes How will the total aggregate costs of “basic” production – Outlays – compare with the total aggregate revenues of basic exchanges – Expenditures? That is to say, How will both existing and reentering workers decide to allocate their money? Will it be for point-to-point consumables, for point-to-line investments, or for engine-off parking without productive purpose in the Redistributive Function? And one may assume that units of enterprise will supply the whatever point-to-point, substitutable-for-one-another, vendables which the people demand.
On the broader economy-wide level, the question implicit in the Statement of Concomitance and Solidarity
P’Q’ = p’a’q’ + p”a”q” (CWL 15, 156-62)
is, given the condition of dynamic macroequilibrium,
G = c”O” –i’O’ = 0 (CWL 15, 50)
and the absolute normative imperative of the equals signs, is How do the three relativistic pretio-quantitalities, P’Q’ = p’a’q’ + p”a”q” , work it out within each other and among oneanother to satisfy the imperious theoretical demand of the equals signs? How does P’Q’ fight it out with p’a’Q’ and p”a”Q”, especially in the case of an excessive money supply? (See below A note re Field Theory and implicit equations)
- Will there be a series of blind stresses and strains, of expansion or contraction, hirings or firings, inflation or deflation, boom or slump – all seeking the macroeconomic equilibrium for which the process has anexigence?
- How will all the new money put into the system recently by the Fed initially circulate? And in whose hands will it finally wind up? Will it go into the pockets of those who a) will spend it initially on point-to-point consumables, b) investment in producer goods for widening or deepening of the capital stock, or c) previously-isssued financial assets so as to inflate the secondary markets for previously issued stocks and bonds, real-estate, and art? Remember, the exchange of one million shares of previously-issued General Motors stock does not produce a single automobile.
- Will the government intervene haphazardly, blindly, and perhaps destructively in the economic process which it has mismanaged, and still doesn’t know how to manage?
- In particular, must a recent flood of free money into the system by the Treasury and the Fed cause a huge inflationary rise in the money-supply scale factor so as to swindle participants who are constrained behind while providing windfall benefits to others who float onward and upward inflating the prices of housing and financial assets?
- Might the Fed decide to “reduce its balance sheet”, which means selling the government bonds in the secondary markets while draining money from those markets. Prescinding from the effects of speculative optimism or pessimism (See CWL 15, 162), the Fed’s increasing the supply of bonds while decreasing monetary demand reduces prices. Thus the Fed would reduce the value of business reserves, retirement funds, and other personal wealth by the dollar amount of its selling.
We quote from CWL 15 to shed light on the answers.
Lonergan insists that the mechanism of the pricing system does not furnish economists with distinctions among significant variables of aggregate surplus (or producer-goods) and basic (or consumer-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)
… without further clarification Schumpeter acknowledged that dynamic analysis called for a new light on equilibrium. Such new light arises when, over and above (DSGE’s) equilibria of supply and demand with respect to goods and services (in classical MACROeconomics), there are recognized further equilibria (crossovers in balance between circuits, and concomitance of outlays with income and of income with both Outlays and Expenditures in each circuit) that have to be maintained if an economy chooses to remain in a stationary state, to embark on a long-term expansion, to distribute its benefits to the vast majority of its members, and so to return to a more affluent stationary state until such further time as further expansion beckons. … Moreover, such macroequilibria are more fundamental than the microequilibria assembled by Walras. (FMD’s macroequilibria) are the conditions of a properly functioning economy. (CWL 15, 92)
The excellence of the exchange solution becomes even more evident when contrasted with the defects of a bureaucratic solution. The bureaucrat … (gives the people) what he thinks is good for them, and he gives it in the measure he finds possible or convenient; nor can he do other wise, for the brains of a bureaucrat are not equal to the task of thinking of everything; only the brains of all men together can even approximate to that. … when a limited liability company has served its day, it goes to bankruptcy court; but when bureaucrats take over power, they intend to stay. … when the pressure of terrorism is needed to oil the wheels of enterprise, then the immediate effect is either an explosion or else servile degeneracy. … the exchange solution is a dynamic equilibrium resting on the equilibria of markets. … every product of the exchange economy must mate through exchange with some other product, and the ratio in which the two mate is the exchange value. The generality of this equilibrium makes it indifferent to endless complexity and endless change; for it stands on a level above all particular products and all particular modes of production. While these multiply and vary indefinitely, the general equilibrium of the exchange process continues to answer with precision the complex question, Who, among millions of persons, does what, among millions of tasks, in return for which, among millions of rewards? Nor is the dynamic solution unaccompanied by a continuous stimulus to better efforts and more delicate ingenuity. For the uniformity of prices means that the least efficient of those actually producing will at least subsist, while every step above the minimum efficiency yields a proportionately greater return.. (CWL 21, 34-35)
… real analysis (is) identifying money with what money buys. … 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, Editors’ Introduction, xxviii quoting Lonergan]
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)
… if the real flows of goods and services move, as it were, in straight lines from the potentialities of universal nature, on the other hand, the dummy flows of money and monetary substitutes, of cash and credit, move in circles. The same currency is used over and over; the same accumulation sustains indefinitely a given volume of credit. One must not be misled by the name ‘circulation’ into thinking of dummies as moving with an angular velocity. They lie very quietly in the reserves of individuals, firms, banks. Only at the instant of exchange or loan do they move and then their movement is instantaneous. The meaning of the term ‘circulation’ is that these instantaneous movements in various directions have to balance with opposite movements. There has to be equilibrium. … funds, like rivers, can be permanent principles of flow only on condition that they permanently are fed by tributary streams. (CWL 21, 57-58)
Recent government stimulus has consisted of transfers of freebies to basic demand through the horizontal D’channel.
… 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]
The mechanism of Functional Macroeconomic Dynamics is more fundamental than the pricing system in the “exchange solution” quoted above.
Lonergan’s intention was ‘to formulate the laws of an economic mechanism more remote and, in a sense, more fundamental than the pricing system…laws which men themselves administrate in the personal conduct of their lives. In 1978 he began to refer to Nicholas Kaldor in support of his judgment that the significance traditionally accorded to price theory by conventional economics since Adam Smith’s Wealth of Nations (1776) amounted to a virtual derailment of economic theory……….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 producer-goods) and basic (or consumer-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)
The channels of Lonergan’s Diagram of Rates of Flow provide a general and universal explanatory frameworkof the always-current process. The channels explain– rather than merely describe or emptily postulate – both the form of dynamic equilibria of the pure cycle of expansion and the dynamic disequilibria of the booms and the slumps. As the economy expands, human ignorance and bias can cause developments to go awry.
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]
A note re Field Theory and implicit equations: In implicit equations, the terms are implicitly defined by the relations in which they stand with one another. In [d”inverno, 1992], under the heading of “Chapter 13, The Structure of the Field Equations”, Ray d’Inverno reads Einstein’s implicit field equations from right to left, left to right, and back and forth. He states:
Before attempting to solve the field equations we shall consider some of their important physical and mathematical properties in this chapter. The full field equations (in relativistic units) are
- The field equations are differential equations for determining the metric tensor gab from a given energy-momentum tensor Tab. Here we are reading the equations from right to left. … one specifies a matter distribution and then solves the equations to ascertain the resulting geometry.
- The field equations are equations from which the energy-momentum tensor can be read off corresponding to a given metric tensor gab. Here we are reading the equations from left to right.
- The field equations consist of ten equations connecting twenty quantities, namely, the ten components of gab and the ten components of Tab. Hence, from this point of view, the field equations are to be viewed as constraints on the simultaneous choice of gab and Tab. This approach is used when one can partly specify the geometry and the energy-momentum tensor from physical considerations and then the equations are used to try and determine both quantities completely. [d’Inverno, 1992, 169]
Analogously, focusing on one of Lonergan’s implicit equations, the terms are implicitly defined by the relations in which they stand with one another: P’Q’ = p’a’Q’ + p”a”Q” [CWL 15,156-62]. We may read from left to right, right to left, or back and forth between right and left.
… Once the possibility of an unbalanced budget is established, the precedent can be invoked to persuade politicians to carry on other wars: wars on illiteracy, on poverty, on ill health, on unemployment, on insecurity. Where the profit motive does not prove efficacious, the state must intervene. … the increasing volume of transactions requires a larger money supply, and the central bank can be persuaded to meet the demand. … it appears to be less evident that a vicious circle of ever more demands for a larger money supply with no increase in real income is inflationary … In any case there has emerged in fact if not in name the welfare state. … Its mechanism is rather strikingly similar to that of the favorable balance of foreign trade. The debt once owed by colonies to richer countries now is replaced by the national debt. … now the long overdue basic expansion is doled out to one’s fellow countrymen under the haughty name of welfare. [CWL 15, 85-86]
Jason Furman is a professor of the practice of economic policy at Harvard University; he was chairman of the White House Council of Economic Advisers, 2013-17.