… the prime cause (whether it be of inequity or inflation) is ignorance. The dynamics … are not understood, not formulated, not taught….. [CWL 15, 82]
man as external agent has not the systematic guidance he needs to operate successfully the machine he controls. [CWL 21, 109]
Academia’s failure threatens economic liberty.
Lonergan realized that failure to understand correctly what is needed if the economic process is to perform well is gravely threatening to democratic liberty. That is why he undertook his serious study of economics. [CWL 15 Editors’ Introduction, xxx]
It’s easy for the so-called pundits on Bloomberg, CNBC, and Fox Business to second-guess, to wait silently for the players fielding grounders or the soldiers in the trenches to make a mistake and then to engage in critical cheap shots. They shoulda done this; they shoulda done that. But the basic issue at hand for all pundits and officials is having a fully explanatory theory and reliable framework which a) explain how the economic process actually works, and which b) can be used to measure, monitor, and properly control the process. Walrasian statics, neo-Keynesianism, neo-classicalism, and the neo-classical synthesis are not adequate explanations of the always current, purely dynamic economic process. The supply of money must be based on the coordination of the magnitudes and frequencies of payments with the magnitudes and frequencies of production in the dynamic, pretio-quantital process.
The Wall Street Journal of 12/29/2021 featured an article by Alan S. blinder, former vice chairman of the Federal Reserve, entitled When It Comes to Inflation, I’m still on team Transitory. The recent Wall Street Journal of 6/2/2022 featured another article by Professor Blinder entitled Inflation Isn’t Transitory, but It Isn’t Permanent Either. We would add that, to a significant extent, inflation is likely to be a permanent swindle on those who held money in the form of cash or receivables during the period of inflation – especially cash saved for retirement.
We wish A. Blinder had been more emphatic in making it clear that a leveling of the rate of inflation to, say, zero, does not undo the permanent damage done to savings accumulated prior to and during the period of inflation. To belabor the obvious: A single year’s 10% inflation in prices prior to a leveling off constitutes a permanent 9.1% decline in the purchasing power enjoyed prior to the inflation. Two years of inflation of 10% each year would be a total inflation of 21.0%; and purchasing power would have declined to 82.6% of what it was prior to the start of that inflation.
Ideally, money would be constant in exchange value; $100 would have the same purchasing power year after year. Inflation and deflation both benefit some at the expense of others. Ideally, money would be constant in exchange value.
… the dummy (money) 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]
(We) 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….More briefly, if there is concomitance between the two flows, then the proportion in which dummies and goods exchange remains the same. If there is lack of concomitance, then this proportion changes. But exchange value is a proportion. Therefore, the concomitance of the two flows is the condition of constant exchange value. [CWL 21, 37-39]
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]
Inflation tortures 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] Inflation enriches those with personal or corporate pricing power who are relatively less vulnerable to inflation and impoverishes those receiving fixed incomes who are relatively more vulnerable. Likewise but conversely, deflation enriches those who are relatively less vulnerable to deflation and impoverishes those who are relatively more vulnerable to deflation.
A. Blinder says,
“Notice the important subtle point here. For food and energy inflation to decline does not require those prices to fall back to earlier levels, only that they stop rising so fast.”.
Right! Inflation is a rate of increase, a rate of change of prices to a higher level, and it is likely to have a permanent effect. The road up may be the road down , but, on the other hand, the egalitarian shift in the distribution of income is, in the main, a merely theoretical possibility.
So far we have been considering the adjustment of the rate of saving in a surplus expansion when that rate is increasing. There remains the opposite situation of the basic expansion when the rate of saving is decreasing. Then the problem that arises is that insufficient income is moving to the basic final market. There is at hand the same automatic mechanism as before. Prices fall. This has the double effect of increasing the purchasing power of income and bringing about an egalitarian shift in the distribution of monetary income. The increase in purchasing power is obvious. On the other hand, the egalitarian shift in the distribution of income is, in the main, a merely theoretical possibility. The fall of prices, unless quantities increase proportionately and with equal rapidity, brings about a great reduction in total rates of payment. Receipts fall, outlay falls, income falls. The incidence of the fall of income, in the first instance, upon the entrepreneurial class, and so in the main it is a reduction of surplus income. Thus we have the same scissors action as before: purchasing power of income increases, and the proportion of basic to surplus income increases; the rate of saving is adjusted to the rates of production as soon as the price level falls sufficiently. But just as there is an upward price spiral to blunt the edge of the mechanism when the rate of saving is increasing, so there is a downward spiral to have the same effect when the rate of saving should be decreasing. Falling prices tend to be regarded as a signal that expansion has proceeded too far, that contraction must be the order of the day. Output is reduced; the income of the lower brackets is reduced; the adjustment of the rate of saving fails to take place; prices fall further; the same misinterpretation arises, and prices fall again. Eventually, however, the downward spiral achieves the desired effect; surplus income is reduced to the required proportion of total income; and the prices cease to fall. (CWL 15,138-9)
Again, (inflation tortures) 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] Inflation enriches those with personal or corporate pricing power who are relatively less vulnerable to inflation, and it impoverishes those receiving fixed incomes who are relatively more vulnerable. Likewise but conversely, deflation enriches those who are relatively less vulnerable to deflation, and it impoverishes those who are relatively more vulnerable to deflation.
A decline of damaging inflation to the rate of zero merely stops the reduction in purchasing power. If the rate of inflation becomes zero, not negative, it does not return prices to their former pre-inflation level. It does not undo the damage done prior to the leveling off. Any partial reversal of inflation tends to generate contractions, liquidations, and layoffs.
A. Blinder also says regarding the correction of inflation “… remember that the effects of tight money on inflation accrue slowly. Prepandemic estimates suggested that anti-inflation monetary policy takes two to three years to have its full effects. So both the Federal Open Market Committee and the commentariat need to be patient. That doesn’t mean the FOMC should delay tightening, it has waited too long already. But it does mean that we should not expect quick results.”
We are not sure of all that A. Blinder might mean at this point in the article by “anti-inflation monetary policy”, “its full effects”, and “tightening”. Does the “policy” include open market operations to achieve “quantitative tightening”, i.e. to increase the supply of government and government-backed securities in the bond market while reducing the amount of money sloshing back and forth between demand in the bond and stock markets? Or is he speaking only of manipulating the rental price of money (the interest rate)? Or might he also be speaking about increasing the banks’ required reserves? And does “its full effects” suggest a return to the prepandemic level of prices or a return of the rate of inflation to zero?
It’s easy for the so-called pundits on Bloomberg, CNBC, and Fox Business to second-guess, to wait silently for the players fielding grounders or the soldiers in the trenches to make a mistake and then to engage in critical cheap shots. They shoulda done this; they shoulda done that. But the basic issue at hand for all pundits and officials regarding what always is the current, purely dynamic process is having an explanatory theory and reliable framework which a) explains how the economic process actually works, and which b) can be used to measure, monitor, and properly control the process. Walrasian macrostatics, neo-Keynesianism, neo-classicalism, and the neo-classical synthesis are not adequate explanations of the always current, purely dynamic economic process. Nor is a general operation on the money supply by the Treasury and Fed which fails to be aware of the current supply, demand and usage percents of a) labor, b) energy, and c) other critical capacities. The supply of money must be based on the coordination of the magnitudes and frequencies of payments with the magnitudes and frequencies of production adequate in the dynamic, pretio-quantital process.
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]
The fundamental issue at hand is not the proliferation of useless, cheap-shot, ignorant, psychopolitical criticism. The fundamental issue is understanding how inflation is a swindle and threat to the financial system, what brought it about, and how to explain so as to avoid it. The fundamental issue is explaining rather than merely postulating inflation.
… the prime cause (be it of inequity or inflation) is ignorance. The dynamics … are not understood, not formulated, not taught….. [CWL 15, 82]
man as external agent has not the systematic guidance he needs to operate successfully the machine he controls. [CWL 21, 109]
Academia’s failure threatens economic liberty.
Lonergan realized that failure to understand correctly what is needed if the economic process is to perform well is gravely threatening to democratic liberty. That is why he undertook his serious study of economics. [CWL 15 Editors’ Introduction, xxx]
Further,
Banks … curtail and even contract loans as soon as an upward spiral of prices menaces the monetary system. … [CWL 15, 138]
… 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 Fed needs a macroeconomic theory, a normative framework, and reliable guidelines based in that sound theory in order to monitor and manage the economy properly. Academia and other professional economists have not given it the guidance required.
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]
… the U.S. economy was experiencing the phenomenon of ‘stagflation’ – a clearly discernible overturning of the conventional economic wisdom about the tradeoff between inflation and unemployment so neatly expressed in the Phillips curve. So-called ‘Keynesian fine tuning onto the neoclassical track’ was not working; and forms of socialist planning only promised to deepen rather than resolve the anomalies of welfare economics. … (Lonergan) believed he had an explanation for what, in a statement from the essay we are editing, he described as a “situation – sometimes thought mysterious – in which consumer prices continuously inflate, new enterprise is evaded, unemployment becomes chronic, and despite inflation the value of stocks declines.” [CWL 15, Editors Introduction, xli]
It is the viewpoint of the present inquiry that, besides the pricing system, there exists another economic mechanism, that relative to this system man is not an internal factor but an external agent, and that the present economic problems are peculiarly baffling because man as external agent has not the systematic guidance he needs to operate successfully the machine he controls. [CWL 21, 109]
The first difficulty is psychological. The static phase is a sombre world for men brought up on the strong drink of expansion. They have to be cured of their appetite for making more and more money that they may have more money to invest and so make more money and have more money to invest. They have to be fitted out with a mentality that will aim at and with a going concern and a standard of living. It is not so easy to effect this change, for as the Wise Man saith, the number of fools is infinite. [CWL 21, 97-98]
We have an ignorant Executive Branch with its Treasury, an ignorant Legislative Branch with its Federal Reserve Bank, and an ignorant academia which is not analytic and scientific.
A. Blinder guesses, “One day, hopefully soon, food and energy prices will level off and the supply chain problem will dissipate Depending on the details of timing, inflation will fall as quickly and dramatically as it rose. We’ve seen it happen before.”
One can’t step into the same river twice. Παντα ρει. All things flow. Insights containing universally valid statements of relations remain true; but the magnitudes of the related variables will change.
This Galilean view … seems to have suffered a crippling wound from the overt claims of Quantum Mechanics. Our argument, however, moves on a different terrain. It appeals to Darwinism and to Quantum Mechanics only as illustrations of scientific intelligence. Its proper premises lie in the dynamic structure of empirical inquiry and in the canons that govern its unfolding. In that field it has noticed that abstraction is not impoverishing but enriching, that in the sense of enriching abstraction classical laws are abstract, that a systematic unification of classical laws does not imply the possibility of imaginative synthesis, that the concentration of systematic relationships in the abstract field leaves the further determinations, needed for concrete applications, non-systematically related to one another. It follows that classical and statistical laws, so far from being opposed, are complementary. It follows that the regularities of our universe result, not from classical laws alone, but from the combination of such laws with suitable constellations of concrete circumstances. (CWL 3, 131/)
We-the-People in the person of our elected officials, their agents, and Walrasian academics are between a rock and a hard place. The distortions wreaked upon the organic system of production, exchange, and finance must be corrected by us or spontaneously work out themselves.
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’ and c”O” as costs of production, having warned the reader that the costs in question are aggregate and functional costs…. (CWL 15 156-57)
We list below a few excerpts buttressing what we have said above implying that, as Einstein redefined commonsense notions of space and time as 4-d spacetime, so Lonergan redefines price and quantity as relativistic price-quantity or pretio-quantitality. A circulatory flow of, say, $100.00 may be comprised of 5 units times $20.00 each, or 25 units times $4.00 each. The quantities and prices are co-operative and relative to one another; so to speak, entrepreneurs make them contend with one another inside the three major implicit price-quantity flows. Consumers may use their incomes of $100.00 to purchase as much of whatever they want with as much income as they have. And units of enterprise may direct their Outlays – which become Incomes – to different combinations of inputs. And, since goods and services are each theoretically indistinct point-to-point in the basic circuit, any distinction between goods and services is non-explanatory and specious. Pointing the reader to further appreciation of the relativistic character of prices and quantities.
Previously I have suggested a lack of adaptation in the free economies to the requirements of the pure cycle. What that lack is can now be stated. It is an inability to distinguish between the significance of a relative and an absolute rise or fall of monetary prices. A relative (i.e. “real”) rise or fall (in prices between and among products) is, indeed, a signal for a relatively increased or reduced production (of one product relative to another)………(much)……..Inversely, the rising prices of the surplus expansion are not real and relative but only monetary and absolute rising prices (resulting from an increase of p”Q”/p’Q’); to allow them to stimulate production (beyond the bounds determined by technical coefficients) is to convert the surplus expansion into a (substantially artificial) boom (which must be followed out of systematic necessity by a corrective and devastating slump-recession-depression). This I believe is the fundamental lack of adaptation to the productive cycle that our economies have to overcome. The problem, however, has many ramifications of which the most important is the relativity of the significance of profits. To this we now turn. (CWL15, 139-140)