The method of circulation analysis … involves a minimum of description and classification, a maximum of interconnections and functional relations. … Analytic thinking uses classes based on similarity only as a springboard to reach terms defined by the correlations in which they stand. [CWL 21, 111]
… the introduction of the notion of the monetary function… takes a further step towards defining a circulation of money……..not a rotational movement……. rather a circular series of relationships of dependence of some flows of payments on other flows. Money moves only at the instant of payment or transfer. Most of the time it is quiescent. … it may also be dynamically quiescent, and then it is held in reserve for some definite purpose. … Money held in reserve for a defined purpose will be said to be in a monetary function. Five such functions are distinguished: basic demand, basic supply, surplus demand, surplus supply, and a fifth redistributive function. (CWL 15, 48)…….
Volume 15 of Collected Works of Bernard Lonergan is entitled Macroeconomic Dynamics: An Essay in Circulation Analysis. Lonergan analyzes and explains the economic process as a circulatory process; that is, as a dynamic organic process of interdependent circulatory flows of goods and services and their functionally-congruent payments. It is to be understood and verified as a coherent set of flows implicitly-defined by their functional relations to one another.
Lonergan’s Functional Macroeconomic Dynamics is a normative field theory. This field theory yields norms to which human participants must adapt in the personal conduct of their lives.
Lonergan prescinds from the subjective human psychology of maximizing economic actors to discover a systematics of objective explanatory relations, which are abstract, invariant, and applicable in any instance. So, simply to get readers to briefly suppress Walrasian macrostatics and to seek explanation in terms of interdependent velocitous and accelerative circulations in circuits, rather than in terms of static intersections of guessed-at supply and demand curves, we show other organic circulations, whose explanation prescinds from – that is, is not based upon – human psychology. The circulations of blood, electricity, water, and money constitute distinct fields of interest having different correlations and laws.
… 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)
Again, and more fully:
A brief exploration of this complexity leads to the introduction of the notion of the monetary function. Thus the argument takes a further step towards defining a circulation of money……..not a rotational movement…….Rather a circular series of relationships of dependence of some flows of payments on other flows. Money moves only at the instant of payment or transfer. Most of the time it is quiescent. … it may also be dynamically quiescent, and then it is held in reserve for some definite purpose. … Money held in reserve for a defined purpose will be said to be in a monetary function. Five such functions are distinguished: basic demand, basic supply, surplus demand, surplus supply, and a fifth redistributive function. (CWL 15, 48)
Only a dynamic analysis of these macroequilibria would make it possible to be specific about ‘the conditions of a properly functioning economy.’ … For both economists and economic agents at large to understand the ‘further equilibria that must be maintained,’ a theoretical grasp of monetary circulation is needed. More fundamental than the money supply by itself – or any of the Keynesial lev era of control – is needed to balance two distinct circuits of supply and demand revealed by an adequate macroeconomic dynamic analysis.
The argument now moves from classes of payments to rates of flows of payments, and from the rates or flows to their circulatory interdependence. Just as there is a dynamic structure of the productive process, so also there is a dynamic structure the monetary circulation. The classes of payment provide the link between the two: the classes are based upon the dynamic structure of the process; the rates or flows, constructed from the classes, aim at an analysis of the circulation. (CWL 15, 45-46)
More below after viewing other circulatory systems:
The human circulatory system.
(Giancoli, 2005, 269)
Circulations in batteries obeying Kirchhoff’s laws.
(Giancoli, 2005, 533)
The Water Cycle through the atmosphere, the earth, and the oceans.
(Wikipedia: https://www.usgs.gov/media/images/natural-water-cycle-jpg)
A home’s plumbing system
“Plumbing” – the system of pipes and other apparatus for conveying water, liquid wastes, etc., as in a building. A home’s plumbing system is a complex network of water supply pipes, drainpipes, vent pipes, and more.
A home’s plumbing systems are a broad network of water and gas supply pipes, drain-waste-vent plumbing, and more.
Re flows into and out of a bathtub
See Stephen Greenwood and Hanke.
The macroeconomic system of monetary flows
(CWL 15, 55)
Macroeconomic Field theory is an immanentism of a unitary system.
- 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 in keeping with both the principle of concomitance (flows keeping pace) and the functional role of credit to bridge brief time gaps, we have for the relations of functional flows among themselves in the basic circuit:
- R’ = E’ = I’ = O’ +M’
- Thus, per 7 above, R’ = E’ = I’ = O’ +[S’ – s’O’] + [D’ – s’I’]
- Thus, per 9 above and 2 immediately above, R’ = E’ = I’ = O’ + [ΔT’ + (O’ – R’) + ΔR’] + [D’ – s’I’]
(The) channels account for booms and slumps, for inflation and deflation, for changed rates of profit, … . [CWL 15, 17]
… production occurs by means of and in view of payments: expenditures that become receipts, and outlays that become income. Money intended for expenditure performs a demand function; and money intended for outlay performs a supply function. Thus, outlay and expenditure, income and receipts, all function as operative in monetary circulation, because they are each functionally congruent with distinct productive processes. [CWL 15, Editors’ Introduction lix]
Again,
A brief exploration of this complexity leads to the introduction of the notion of the monetary function. Thus the argument takes a further step towards defining a circulation of money……..not a rotational movement… . Rather it is a circular series of relationships of dependence of some flows of payments on other flows. Money moves only at the instant of payment or transfer. Most of the time it is quiescent. … it may also be dynamically quiescent, and then it is held in reserve for some definite purpose. … Money held in reserve for a defined purpose will be said to be in a monetary function. Five such functions are distinguished: basic demand, basic supply, surplus demand, surplus supply, and a fifth redistributive function. (CWL 15, 48 )
Circulation analysis reaches “terms defined by the correlations in which they stand.”
The method of circulation analysis resembles more the method of arithmetic than the method of botany. It involves a minimum of description and classification, a maximum of interconnections and functional relations. Perforce, some description and classification are necessary; but they are highly selective, and they contain the apparent arbitrariness inherent in all analysis. For analytic thinking uses classes based on similarity only as a springboard to reach terms defined by the correlations in which they stand. To take the arithmetic illustration, only a few of the integral numbers in the indefinite number series are classes derived from descriptive similarity; by definition, the whole series is a progression in which each successive term is a function of its predecessor. It is this procedure that gives arithmetic its endless possibilities of accurate deduction; and, as has been well argued, it is an essentially analogous procedure that underlies all effective theory. [CWL 21, 111]
And the technique of implicit definition yields terms defined by their functional relations to one another in a process of circulation.
On such a methodological model (i.e. implicit definition)…Classes of payments quickly become rates of payment standing in the mutual conditioning of a circulation; to this mutual and, so to speak, internal (monetary) conditioning there is added the external (monetary) conditioning that arises out of transfers of money from one circulation to another; in turn this twofold conditioning in the monetary order is correlated with the conditioning constituted (in the hierarchical productive order) by productive rhythms of goods and services; and from the foregoing dynamic configuration of conditions during a limited interval of time, there is deduced a catalogue of possible types of change in the configuration over a series of intervals. There results a closely knit frame of reference that can envisage any total movement of an economy as a function of variations in rates of payment, and that can define the conditions of desirable movements as well as deduce the causes of breakdowns. Through such a frame of reference one can see and express the mechanism to which classical precepts are only partially adapted; and through it again one can infer the fuller adaptation that has to be attained. [CWL 21, 111]
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)
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)
(Ideally,) the dummy (would) 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 familiar phenomena of booms and slumps that can be experienced and empirically verified by anyone – Kitchen or Juglar, or Kondratieff cycles – can be satisfactorily analyzed only by means of a system of basic terms in which the terms are defined by their relations to each other, and the relations fixed by the terms. The definitions must in other words be implicit, as are the definitions of basic terms like ‘point’ and ‘line’ in David Hilbert’s rigorous restatement of classical geometry. (CWL15, Editors’ Introduction liv-lv)
To conclude, the acceleration of the productive process, if it is to succeed and not be destroyed by maladjustments to change of phase, postulates that in a proportionate expansion the rate of saving be constant, that in a surplus expansion it increase, and [that] in a basic expansion it decrease. While this decrease need not reduce the standard of living of employers or deprive them of the means to meet the costs of maintenance, it may mean that they will not have the excess of income that may be labeled ‘money to invest.'(CWL 15, 129, and 133)
Financial plumbing problems
A sustained lack of balance portends ruin.
It is a common saying that savings equals investment. On the present showing it would be more accurate to say that the crossovers should balance, that a sustained lack of balance portends ruin, … The advantage of such greater accuracy is that it does not suggest an immediate correlation between savings and investment. Provided the crossovers balance, surplus income equals surplus supply. [CWL 15, 70]
Neither circuit can be allowed to drain the other circuit.
G = c”O” – i’O’ = 0 (The condition of equilibrium)
Possible variations and lags:
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]
The equilibrium of the economic process is conditioned by the balance of the two circuits:
Again, neither circuit can be allowed to drain the other circuit.
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. That is the essence of dynamic disequilibrium. [CWL 15, 175]
Money wrongly-directed and spent may cause booms and slumps:
In an initially equilibrated economic process, new and additional money entering through (D’-s’I’) and (D”-s”I”) belongs to the theory of the pathology of booms and slumps. In one case, new and additional money entering through (D’-s’I’) and (D”-s”I”) is intrinsically inflationary, thus a reduction of purchasing power constituting a swindle rather than fair exchange.
With G at zero, 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 is on 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. [CWL 15, 64]
A government’s budget deficit is intrinsically inflationary:
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 … [CWL 15, 85-86]
It is a common saying that savings equals investment. On the present showing it would be more accurate to say that the crossovers should balance, that a sustained lack of balance portends ruin, … The advantage of such greater accuracy is that it does not suggest an immediate correlation between savings and investment. Provided the crossovers balance, surplus income equals surplus supply. [CWL 15, 70]
The Diagram of Government Spending and Taxes
(See CWL 15, 173-176)
