This post was originally entered on May 30, 2022.  We repeat it now because it remains relevant.

“The road up and the road down is one and the same. (Heraclitus)
ὁδὸς ἄνω κάτω μία καὶ ὡυτή

Archaeologists and scholars have not found the context of this isolated fragment of Heraclitus.  What “road” was he referring to, and was he was speaking literally or figuratively? I simply like the statement as an introduction to the ups and downs of distinct price-quantity flows, whether in a pure cycle of expansion or in a distorted cycle of inflationary boom and corrective slump.

The general principles of quantity and price changes in a pure cycle or in a boom and corrective slump are treated mostly in the later sections of CWL 15:

• Section 18, pp. 75-80 Phases in the Productive Process
• Section 25, pp. 128-33 Prices and Quantity Changes in Accelerating Circuits
• Section 26, pp. 133-44 The Cycle of Basic Income
• Section 27, pp. 144-56 The Cycle of Pure Surplus Income
• Section 28, pp. 156-62 The Cycle of the Aggregate Basic Price Spread

In using Lonergan’s treatment to critique the contemporary inflation, one must keep in mind that Lonergan assumes a rational control of the money supply by We-The-People’s fiscal and monetary agents. In particular, and as represented in the Diagram of Rates of Flow below, Lonergan notes that

… , the normal entry and exit of quantities of money to the circuits or from them is by the transfers from the redistributive to the supply functions.  [CWL 15, 64]

… 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]

operative payments have been defined as standing in a network congruent with the network of the productive process; it follows that we have to deal with quantities of money congruent with the values emerging in the productive process (turnover dollar magnitudes), and with the velocities (turnover frequencies) of money congruent with the velocities of the productive process.  [CWL 21, 135]

… variations in E’ and E” postulate, in turn, parallel variations in I’ and I”.  The normal source of basic expenditure is basic income, and the normal source of surplus expenditure is surplus income.  As was argued in Section 15, a condition of successful circuit acceleration is that O’, I’, and E’ keep in step, that O”, I”, E” do likewise, that (D’ – s’I’), (D” – s”I”), and G remain zero.(CWL 15, 131)

A general operation upon the supply of money seems to be a rather roundabout and inept procedure to correct an error in (the) distribution (of incomes). [CWL15, 143]

 (D’ – s’I’) satisfies general conditions of circuit acceleration by being zero, so that E’ equals I’, then since E’ equals P’Q’ one may write

P’Q’ = p’a’Q’ + p”a”Q” (44)

So, to explain the current situation, the critic must keep in mind that the Executive Branch with its U.S. Treasury and the Legislative Branch through the agency of its accommodative Federal Reserve Bank have recently flooded the system with free money. This empty money, uncorrelated with the actual magnitudes and frequencies of turnovers, has had to circulate and wind up somewhere to cause an effect, or, more precisely, to explain the phenomenon of inflation..

We hope the readers will scour the Sections listed above with the prior understanding that the condition of equilibrium – the balance of the crossovers, c”O” and I’O’ – requires continuous adjustments to normative basic income for a standard of living and pure surplus income (savings) for investment for ultimate benefit to society. Rising prices are normal as a response to scarcity but economically pathological as a response to disequilibria caused by maldistribution of Incomes or flooding the system with free money.

We can list only certain phrases and sentences stating tendencies, principles, and laws to whet the reader’s appetite for an adequate understanding and perspective re proper management of the economic process and re an explanation of the present issue of inflation.

Key phrases below include the following:

• Increasing quantities tend to imply increasing prices.
• decreasing quantities imply decreasing prices only in truly competitive markets.
• Increasing or decreasing prices have the double effect of decreasing or increasing the purchasing power of money while thus effecting a change in the distribution of incomes.
• operative payments have been defined as standing in a network congruent with the network of the productive process; it follows that we have to deal with quantities of money congruent with the values emerging in the productive process (turnover dollar magnitudes), and with the velocities (turnover frequencies) of money congruent with the velocities of the productive process.  [CWL 21, 135]
• there would follow a rise in prices quite different in kind from the normal rise resulting from increasing scarcity. Such a rise would not be an ordinary scarcity but at once a consequence and … a corrective of a disproportion between monetary and real consumer income.
• when prices rise or fall because the distribution of income has not anticipated these requirements correctly, then price variation is not a postulate for variation in E’ and E” but rather a spontaneous effort at adjusting what should already have been adjusted.
• the mechanism of rising prices involves a shift in the distribution of monetary income in favor of the higher income brackets and so in favor of surplus income
• 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.
• On the other hand, the egalitarian shift in the distribution of income is, in the main, a merely theoretical possibility.
• 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
• 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.
• Previously I have suggested a lack of adaptation in the free economies to the requirements of the pure cycle. 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).

Section 18: Phases in the Productive Process

79 `… only with a notable lag (think of a succession of five-year plans) does there begin the large-scale transformation of basic means of production.  It follows that wages paid in the surplus sector will notably increase basic demand, that that demand as yet cannot be met with goods and services, that accordingly prices will rise, the difference between receipts and costs will mount.

79 For a while surplus outlay and income will increase.  But sooner or later the self-development of the surplus sector will begin to taper off; the principal source of the basic price spread ceases to be a gusher; and at the same time the demand for labor in the basic sector will begin to exact an increase in wage rates.

Section 25: Price and Quantity Changes in Accelerating Circuits

128 Expressions for the rate of change in prices, dP’ and dP”, and in quantities, dQ’ and dQ”, have now to be related to the various phases in the cycle of the productive process.

129 Increasing quantities tend to imply increasing prices.  For as quantities keep increasing, competitive bidding for resources arises among those that wish to remain in the game. … the pressure goes beyond bounds when the possibility of further expansion comes to an end, with no end imposed on the granting of credit.

129  … decreasing quantities imply decreasing prices only in truly competitive markets.  Oligopolist managers can agree to prefer the prior prices, when their alternative would be to pay higher prices for their supplies and receive lower prices when their turn to sell comes around.  Similarly, labor leaders are loath to accept any appearance of declining wages and other benefits.

129 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.

130 it is normal for rates of production to increase in geometrical progression in a long-term acceleration: the greater the rate of production, the greater the capacity to increase that rate.  On the other hand, falling prices are a signal for a slump.  Prices falling in a geometrical progression would soon inflict enormous losses on every entrepreneur.  (Again, keep in mind the recent flooding of the system with trillions of empty money.)

130 In the second place, prices tend to move in the same direction as quantities.  Prices rise in a boom, when quantities increase, to fall in a slump, when quantities decrease.  However, the causes of such price variations are of two kinds.  There is the normal causality of increasing or decreasing scarcity. …

131 … variations in E’ and E” postulate, in turn, parallel variations in I’ and I”.  The normal source of basic expenditure is basic income, and the normal source of surplus expenditure is surplus income.  As was argued in Section 15, a condition of successful circuit acceleration is that O’, I’, and E’ keep in step, that O”, I”, E” do likewise, that (D’ – s’I’), (D” – s”I”), and G remain zero.

131 (But) There would be … a radical maladjustment between circuit and productive acceleration if, when surplus rates of production were increasing more rapidly than basic, basic rates of income (recently) were increasing more rapidly than surplus.  The interval after interval, an increasingly excessive amount of monetary income would be moving to the basic final market, and there would follow a rise in prices quite different in kind from the normal rise resulting from increasing scarcity.  Such a rise would not be an ordinary scarcity but at once a consequence and … a corrective of a disproportion between monetary and real consumer income.

131 when prices rise or fall because the distribution of income has not anticipated these requirements correctly, then price variation is not a postulate for variation in E’ and E” but rather a spontaneous effort at adjusting what should already have been adjusted.

Section 26: The Cycle of Basic Income

133 The purpose of this section is to inquire into the manner in which the rate of saving W is adjusted to the phases of the pure cycle of the productive process.  Traditional theory looked to shifting interest rates to provide suitable adjustment.  In the main we shall be concerned with factors that are prior to changing interest rates and more effective.

operative payments have been defined as standing in a network congruent with the network of the productive process; it follows that we have to deal with quantities of money congruent with the values emerging in the productive process (turnover dollar magnitudes), and with the velocities (turnover frequencies) of money congruent with the velocities of the productive process.  [CWL 21, 135]

135-7 Evidently, then, suitable migrations are a means of providing adjustments in the community’s rate of saving.  To increase the rate of saving, increase the income of the rich. … to decrease the rate of saving, increase the income of the poor. … The foregoing is the fundamental mode of adjusting the rate of saving to the phases of the productive cycle.It reveals that the the surplus expansion is anti-egalitarian, … but it also reveals the basic expansion to be egalitarian, …… However, this fundamental mode of adjustment is complemented by a further mechanism of automatic correction … the movement of price levels … but its operation is conditioned.

136 “Thus the mechanism of rising prices involves a shift in the distribution of monetary income in favor of the higher income brackets and so in favor of surplus income

137 The foregoing mechanism (of rising prices) provides an automatic adjustment to(wards) an increasing rate of savings.  However, its operation is conditioned.  Unless the quantity of money in circulation expands as rapidly as prices rise and, as well, as rapidly as the productive expansion of quantities requires, there will result a contraction of the process. … … (and) unless the increment in total monetary income goes to higher income brackets and so to surplus income, there will be no adjustment to the rate of saving. … These two types of failure of the automatic mechanism are interrelated.  (CWL 15, 137)

137-38 Banks are willing to increase the quantity of money as long as there is no appearance of uncontrolled inflation, but they curtail and even contract loans as soon as an upward spiral of prices menaces the monetary system.  Thus the root of the failure of the mechanism is the failure to obtain the anti-egalitarian shift in the distribution of income.

Review Steven Gjerstad and Vernon L. Smith, From Bubble to Depression

137 ftnt 193… when prices rise, organized labor can point to the increased cost of living and the increased profits that prove industry’s ability to pay higher wages.  If industry yields, prices rise still higher, and the complaints recur with the same results.  Such is cost-push inflation.

138-9 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.

139 The present point is a very simple point.  Just as the surplus expansion is antiegalitarian in tendency… so the basic expansion is egalitarian in tendency …

139-40 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 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; 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

Section 27: The Cycle of Pure Surplus Income

151 It is to be observed that this (surplus) phase has no necessary implication of an inflationary rise in prices.  That occurrence is conditioned by the failure of the rate of saving to keep increasing rapidly enough. If the pure surplus is captured by the higher income brackets alone, the anti-egalitarian shift in the distribution of income is being achieved.  If not, saving is insufficient; prices rise; total  income increases; and this increment, at least in the first instance when it appears as a broader price spread, will go to the higher income brackets to combine an anti-egalitarian shift with a reduced purchasing power, which pinches the lower income groups.

153-4 While we can effect the anti-egalitarian shift 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 strainsof a prolonged depression.

155-6 Now whenever the basic stage accelerates more rapidly than the surplus stage, the rate of saving has to decrease continuously.  But in the depression there is already an excessive rate of savings, and only a distorted equilibrium is had through the simultaneous existence of a rate  of losses. Further decrease in the required rate of savings only intensifies the problem; spontaneously it will work out through the mechanism of falling prices and contracting total income; that under current inadaptation an expansion could be expected against such difficulties is evidently preposterous. On the other hand, increasing contraction and liquidation tends to reduce the requirement for a rate of losses: with the surplus stage already operating at a minimum, any further reduction of the basic stage means that a zero dQ”/Q” is greater than a negative dQ’/Q’; this postulates an increasing rate of savings, and under the circumstances, this increase of required savings (since actual savings already are too great) is a reduction of losses.⁵  Thus the greater the contraction, the less the rate of losses required; again, the greater the contraction, the weaker the position of the initially invulnerable⁶; in the limit the rate of losses will disappear, and a distorted equilibrium⁷ give place to a true equilibrium.⁸  Meanwhile, obsolescence will have mounted, and so as orders for replacements begin to increase they will be accompanied by surplus purchases that are new fixed investment; v⁹ begins to increase, and the proportionate expansion of the revival is underway.

155 (Given the failure to implement the basic expansion,) the systematic requirement of a rate of losses will result in a series of contractions and liquidations. …

155 until the position of the strong is undermined by the general and prolonged contracting, the requirement for the rate of losses continues, and with it the depression.

 Section 28 The Cycle of the Aggregate price spread

157 Let us now introduce two cost price indices, p’ and p”, which are defined the the equations

c’O’ = p’a’Q’ (41)

c”O” = p”a”Q” (42)

whence by equation (4)

I’ = p’a’Q’ + p”a”Q” (43)

 Now, when (D’ – s’I’) satisfies general conditions of circuit acceleration by being zero, so that E’ equals I’, then since E’ equals P’Q’ one may write

P’Q’ = p’a’Q’ + p”a”Q” (44)

Dividing through by p’Q’ one may write

J = P’/p’ = a’ +a”R (45)

160 :thus an initial rise in prices sets going a speculative expansion that makes the acceleration factors quite notable, expands the price spread still more, and stimulates a pace of further acceleration that it will be quite impossible to maintain. Differentiating equation (45) one has

dJ = da’ + Rda” + a”dR

161 Thus the price-spread ratio J contracts; the basic price level falls; speculators are disillusioned.  There is a minor crisis.

161 … as the surplus stage generalizes long-term acceleration, R increases and dR becomes positive to expand again the price spread and to kep it expanding.  As this proceeds, there develops another speculative boom.

161 “When then prices begin to fall to effect the continual reduction of the price spread, there follows sooner or later the real and final crash.

162 It is to be recalled that the account given of the cycle of the basic price-spread ratio supposes (D’ – s’I’) to be zero throughout.  A speculative boom in the stock market which encourages basic spending may be represented by a positive (D’ – s’I’); there is an excess release of money from the Redistributive Function to the basic demand function.  Alternatively, it may be represented by an upward revision of the fractions w_i of total current income going to basic demand, while the fact that the surplus final suffers no contraction then results from the excess of the rate of new fixed investment over the rate of pure surplus income, so that D” is positive.  In either case, a movement of this type with its basis in redistributional optimism will offset any tendency towards a contraction of the price spread and will reinforce any tendency of the price spread to expand.  On the other hand, the subsequent stock market break intensifies the crisis of the circuits, removing the props that had swollen expansive tendencies, and leaving the system with a greater height from which to fall. (CWL 15 162 )