The Wall Street Journal of 4/6/2022 featured an article by William A. Galston entitled “How Will Inflation End?” W. Galston noted that Larry Summers has had a reliable sense of recent excesses and their inexorable consequences. Summers has been right in emphasizing for a long time the inequitable consequences of the intrinsically-inflationary flooding of the money supply by the executive and legislative branches through the agency of the U.S. Treasury and the accomodative Federal Reserve Bank.

This website has maintained all along that any nation needs a **complete and verifiable explanatory formulation **of how its overall dynamic economic functioning actually works. An **explanatory systematics** would have to prescind from the vagaries of human psychology; and it would be an **abstract** formulation **isomorphic** with the **intelligible explanatory correlations** immanent in the data of the constituent interdependent functionings of production and exchange.

*… 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] *

**Our 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]

There is a need to understand the functional interdependencies among the pretio-quantital flows. Neither corporate bookkeeping nor its aggregation in the Gross Domestic Product yields a **normative theory** which can be used **to avoid the disequilibria** of boom and corrective slump, inflation and deflation.

As electromagnetics explains electrical and magnetic phenomena so that designers can reliably design our power and lighting systems and identify problems, so “Functional Macroeconomic Dyamicss – ” AKA “Macroeconomic Field Theory” and “Macroeconomic Relativity Theory” – yields a tightly-knit **framework** and a **complete explanation** of how the always current, purely dynamic, objective, concrete, pretio-quantital, economic process actually works; and, thus, FMD enables academia, government, and corporate executives to understand and identify what would be **intrinsically disequilibrating combinations** of pretio-quantital circulations.

FMD is not a bunch of Walrasian supply-demand curves. It is not a macrostatics. It is not a textbook efficient-cause theory of action and the reaction provoked by the action. It is a macrodynamical, **formal-cause** theory.

*Taking into account past and (expected) future values does not constitute the creative key transition to dynamics. Those familiar with elementary statics and dynamics (in physical mechanics) will appreciate the shift in thinkinginvolved in passing from equilibrium analysis (of for example a suspended weight or a steel bridge)…to an analysis where attention is focused on second-order differential equations, on d^{2}θ/dt^{2}, d^{2}x/dt^{2}, d^{2}y/dt^{2}, on a range of related forces, central, friction, whatever. Particular boundary conditions, “past and future values” are relatively insignificant for the analysis. What is significant is the Leibnitz-Newtonian shift of context. [McShane, 1980, 127]*

*Ought there not to be introduced a technical term to denote this type of intelligibility? … The intelligibility that is neither final nor material nor instrumental nor efficient causality is, of course, formal causality…What we have called the intelligibility immanent in sensible data and residing in the relations of things to one anothermight be named more briefly formal causality … [CWL 3, 78/101-102]*

FMD is a theory of the **immanent intelligibility** or **“formal cause”** of the objective process. It is a **field theory** of the relations of explanatory functionings **among themselves**.

*… 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)*

In simple terms, the excess inflating of the money supply – irresponsibly decoupled from the magnitudes and frequencies of the real process of production and exchange –**explains** the inflation which constitutes the **absorption** of the excess money into inflated values. Also, It must be understood that **inflation and deflation are swindles**. Neither inflation nor deflation are to be caused deliberately or to be taken lightly. To benefit one group is to harm another group. **Ideally** the dummy money **would be constant in exchange value**.** Ideally**,

*… 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] *

The road up may in theory match the road down, but the problem is that those benefitting from the (artificial) boom perceive their gains as real rather than artificial; and one doesn’t easily extract from people gains perceived to have been legitimately earned. Such is colloquially described as confiscation. So the reversal of an excess quantitative easing in order to cure its correlated inflation may be facilely described by the phrase “quantitative tightening,” but effecting the reversal by taxation is not so facile. Though it will be casually described as a mere quantitative reversal, it will be perceived as and called confiscation by taxation and recession.

*When those folks bought the stock at ($11.00), they artificially inflated the net worth of all the shareholders…….That’s because brokerage statements indicate that everyone’s stock is worth the last share price multiplied by the number of shares they own….This huge collective amount … is the non-existent money that people believe they have lost when a stock tanks*

*But what if they had all sold the stock at its peak? Nope. That was never possible. (See Marilyn Vos Savant, Parade Magazine, 4/5/09)*

First, we offer some excerpts relative to the above comments; then we print references to related topics. As usual, we emphasize the Diagram of rates of Flow and its explanatory power.

**The channels model a systematics of interdependent functional relations.**

*More positively, the channels (of the Diagram) 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]*

*I would add that the aims and limitations of macroeconomics (that is, the circulation analysis presented here) make the use of a diagram particularly helpful, … For its basic terms are defined by their functional relations. (CWL 15, 54)*

The Diagram is a **Representation** or **Model** of the **explanatory** interconnections and interdependencies of **functional** **monetary flows** – price times quantity – in the always-current, purely-relational, dynamic, economic process. The reader should view **a)** the diagonal arrows as **operative monetary flows** in the process of production and exchange, and **b)** the vertical and horizontal arrows as monetary dealings between the operative circuits and the redistributive functionings of banks, insurance companies, etc. In the alternative names below, the words “**Model**” or “**Model of**” may be substituted for “Diagram” or “Diagram of”. Depending on one’s momentary interest and point of view, this schematic may alternatively be called:

- The Diagram of Two Operative Circuits Connected by Operative Crossovers
- The Diagram of Functional Monetary Interdependencies
- The Diagram of the Relations of Monetary Functions Among Themselves
- The Configuration of Monetary Conditions
- The Diagram of Operative Functional Flows of Products, Payments, and Financings
- The Diagram of Monetary Channels
- The Diagram of Monetary Transfers
- The Diagram of Circulations
- The Diagram of the Monetary Correlates of the Productive Process
- The Diagram of Interdependent, Implicitly-Defining, Mutually-Conditioning Velocitous Functionings
- The Diagram of Explanatory Interconnections
- The Double-Circuited, Credit-Centered Diagram which Sublates, Supervenes, and Replaces the Single-Circuit, Credit-Centered Diagram of Macroeconomics Textbooks
- The Functional Framework
- (Colloquially) The Way the Process Works
- (Colloquially, because of its shape) Lonergan’s Baseball Diamond

The diagram prescinds from **a)** trade imbalances, **b)** government surpluses and deficits, and **c)** other collective surpluses and deficits, which can be imaged by superposed circuits lacking vital *c’O’* and *c”O”* flows.

*Ought there not to be introduced a technical term to denote this type of intelligibility? … The intelligibility that is neither final nor material nor instrumental nor efficient causality is, of course, formal causality…What we have called the intelligibility immanent in sensible data and residing in the relations of things to one anothermight be named more briefly formal causality … [CWL 3, 78/101-102]*

*… 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)*

*Again, to take perhaps a simpler and more familiar example, if someone is doing physics and you open his book, what do you find? You find just mathematical equations. He is solving problems, and what is it? It is more mathematics. **Why do you say he is doing physics? He seems to be doing mathematics all the time. It is because there are regions of mathematics that are isomorphic with physical reality. There is the same relational structure between a given mathematical theory or system as there is between events that can be observed. This is another case, a big case, of isomorphism: on the one hand, mathematical expressions, and on the other hand, physical events. There is the same relational structure. But in the mathematical case, the relational structure links symbolic expressions, or mathematical concepts, with one another, while in the physical case what are related are concrete physical events, wave lengths that you observe through a machine and so on. ¶ So there is an isomorphism of geometry, algebra, physics; the same relational structure can be found in all three. Consequently, one’ symbolism can be given a geometrical interpretation, or an algebraic interpretation, or a physical interpretation. [CWL 18, 32-33]*

*… 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]*

*There is the tremendous simplification (a diagram) effects 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. (CWL 15, 54)*

*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]*

*While we can effect the anti-egalitarian shift (of incomes distribution) with some measure of success, in fact the egalitarian shift (required for the basic expansion) is achieved only through the contractions, the liquidations, the blind stresses and strains of a prolonged depression. (CWL 15, 153-54)*

*The ineptitude of the procedure arises not only from its inadequacy to effect a redistribution of income of the magnitude required but also from its effects upon the demand for money. … The effect of rising interest rates on consumer borrowing will be excellent as far as it goes; for it cannot but reduce consumer borrowing; on the other hand, one may doubt if such reduction is very significant, for an inability to calculate is a normal condition of consumer borrowing, and rising interest rates hardly exert a great influence on people who do not calculate. The effect of rising interest rates on the demand for surplus products is great: one may say that the initiation of further long-term expansion is blocked; to increase the interest rate from 5% to 6% increases by 10% the annual charge (FTNT. That is, increases in the annual charge by approximately 10%. The precise increase would be 8.557% ir payments were made monthly; 8.651% if payments were made annually.) upon a piece of capital equipment paid for over 20 years. Thus rising interest rates end further initiation of long-term expansion; on the other hand, expansion already initiated, especially notably advanced, will continue inasmuch an increaded burden of future costs is preferred to the net loss of deserting the new or additional enterprise. The effect of rising interest rates on turnover magnitudes depends upon the turnover frequency of the enterprise. If the frequency is once every two years, 1% increase in the rate of interest is a 2% increase in costs; if the frequency is once every month, 1% increase in the rate of interest is 1/12 of 1% increase in costs. Effects of the latter order are negligible when prices are rising. Indeed, then even a 2% increase might be disregarded; but the combination of the 2% increase in costs with the uncertainty of what prices will be in two years’ time is a rather powerful deterrent. The effect on turnover magnitudes, accordingly, is great when the turnover frequency is low, but negligible when the frequency is high. … ¶ However, the following conclusions seem justified. When the rate of saving is insufficient, increasing interest rates effect an adjustment. This adjustment is not an adjustment of the rate of saving to the productive process but of the productive process to the rate of saving; for small inctrements in interest rates tend to eliminate all long-term elements in the expansion; and such small increments necessarily precede the preposterously large increments needed to effect the required negative values of dw_{i}. Finally, the adjustment is delayed, and it does not deserve the name of adjustment. It is delayed because the influence of increasing interest rates on short-term enterprise is small. It does not deserve the name ‘adjustment’ because its effect is not to keep the rate of saving and the productive process in harmony as the expansion continues but simply to end the expansion by eliminating its long-term elements. (CWL 15, 143-44)*

*In brief 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. … No doubt Keynes was an economist first and a methodologist second … Lonergan, for his part, is perhaps a methodologist first and an economist second, but he was able to push his economic reflections further than Keynes because he had a firmer grasp of the essentials of an effective theory. … Lonergan’s critique (shows that) … the emphasis shifts … to searching heuristically for the maximum extent of (functional) interconnections and interdependence; and that the variables (of the mechanism) discovered in this way might not resemble very much the objects (or the aggregates) (such as coincidental prices) which, in the first instance, (the non-methodologist) was thinking about. [Gibbons 1987]*

**References to Related Topics**

The Road Up is the Road Down; The Mechanism of Rising or Falling Prices

The Correlation of the Need for Money With the Magnitudes and Frequencies of Turnovers

Facing Facts: The Ideal Of Constant Value Of The Currency vs. The Fact Of Inflation

Postulating vs. Explaining in Macroeconomics

Criticism Requires an Normative theory