There is sufficient content in this Section 26 to serve as the basis of an impressive graduate thesis featuring explanatory first- and second-order differentiations of interdependent functional activities implicitly defined by their functional relations to one anther.  The set of equations would constitute a significant part of a complete explanatory theory.

• Part I: Introductory

• Part II – Divergent Flows of Products and Money; Consequent Inflation or Deflation

  • Case A: The problem of an inadequate rate of saving in a surplus expansion; I”/(I’+I”)

  • A note re stagflation stifling a full surplus expansion

  • Case B: The problem of an excessive rate of saving in a basic expansion

• Part III – Outline of Traditional Theory’s Lack of Understanding re Artificially Manipulating Interest Rates

• Part IV – Selected Excerpts and Comments Relevant to CWL 15, Section 26, “The Cycle of Basic Income,”  pages 133-44

Part I – Introductory

Macroeconomists who attempt to critique and advise the managers of the always-current, purely-dynamic, economic process would benefit greatly from reading carefully CWL 15’s Section 26, titled The Cycle of Basic Income.

[CWL 15] Lonergan, Bernard (1999), Macroeconomic Dynamics: An Essay in Circulation Analysis, ed. Frederick G. Lawrence, Patrick H. Byrne, and Charles Hefling, Jr., vol 15 of Collected Works of Bernard Lonergan, (Toronto: University of Toronto Press) [CWL 15]

Initially, let us print 4 conclusions to pique the reader’s interest and to preview where we are heading.

…, the following conclusions seem justified.  When the rate of saving is insufficient, increasing interest rates affect 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 increments 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, 144)

The traditional doctrine of thrift and enterprise looked to the supply of and demand for money to adjust interest rates and the adjusted rates to adjust the rate of saving to the requirements of the productive process.  But it can be argued that a) this view was not sufficiently nuanced in its estimate of the requirements of the productive process, b) that it missed the magnitude of the problem, and c) that it tended to lump together quite different requirements. … [CWL 15, 140, ftnt. 197]

The simplest manner of attaining a fairly adequate concept of basic income is to divide the economic community into an extremely large number of groups of practically equal income. … Hence, in migrations from low to less-low income groups, most of the increment of individual total income becomes an increment of basic income; but in migrations from high to still higher income groups, most of the increment of individual total income becomes an increment of surplus income.  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; while they may be too distant from the current operations of the economic process to judge, at least they can put their money into the bank or bonds or stocks, and perhaps others there will see how it can best be used.  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. …(and) this fundamental mode of adjustment is complemented by a further mechanism of automatic correction.  (price changes) (CWL 15, 133-134)

Thus, the general theory of circuit acceleration is that it takes place in a constrained and limited way when quantities of money in the circuits are constant, but without let or hindrance (but not necessarily a runaway) when quantities of money are variable. Finally, provided (D’-s’I’), (D”-s”I”), G vary only slightly from zero, so that their action is absorbed by stocks of goods at the final markets, they exercise a stimulating effect in favor of positive or negative circuit acceleration; otherwise their action pertains either to superimposed circuits of favorable balances of foreign trade and deficit government spending, or else to the cyclic phenomena of booms and slumps.  (CWL 15, 64-65)

We recall that the condition of dynamic equilibrium in any current economic expansion is that a) the Fed have injected the proper amount of money into the system for the transactional requirements of the phase of the pure cycle, and that b) the monetary crossover flows between the basic and surplus circuits be balanced:

G = c”O” – i’O’ = 0  (CWL 15, 48-51).

That is to say that the fractions I”/(I’ + I”) and I’/(I’ + I”) equal the requirements for distributions of income for saving vs. expending during the particular current phase the current pure cycle of expansion.

The flow of money into either circuit may become excessive or insufficient during either a surplus expansion or a basic expansion. Excessive inflows of money chasing constant or inertial product flows of the particular circuit would cause and explain inflation, which would be a reduction of the purchasing power of the currency; on the other hand, insufficient flows into the circuit would cause and explain deflation, which would be an increase in purchasing power, but diminished receipts to units of enterprise. So, in our consideration of monetary flows we are dealing with two circuits, two crossover flows, possible divergences of velocitous flows from normativity, possible inflation or deflation, possible loss or gain of purchasing power, and possible booms and slumps. 

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)

… 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]

A completely explanatory theory must be based upon principles of concomitance, solidarity, congruence, and implicit definition of functional flows in an implicit equation.  The pattern of terms and relations is isomorphic with the patterns of the abstract correlations among the measured data of the constituent interdependent functional flows.

Part II – Divergent Flows of Products and Money; Consequent Inflation or Deflation

 (page 133, lines 11-15) The purpose of CWL 15, Section 26 is to inquire into the manner of the adjustment of the rate of investable savings, (W = I”/(I’ + I”), to the requirements of the current phase of the pure cycle of expansion. )

 (page 133, line 16 – page 134, line 24). The concepts of a) tiers (brackets, groups) of lower-to-higher total personal Incomes, and of b) each tier’s propensity to consume rather than to invest  

(page 134, line 25 – 135, line 25) Fundamental adjustments to saving-for-investment associated with income-level changes: a) adjustments to the income-level and to the purchasing power of individuals in each tier, and b) the concomitant  “migrations” of income-recipients to higher or lower tiers

 (135, line 25 – p. 136, line 3) The double effect of price changes in a circuit: a) contraction or expansion of purchasing power, b) shifts in the distribution of income to higher or lower income brackets

Case A:

The problem of inadequate saving in a surplus expansion

(page 135, line 19 – page 138, line 12); In the surplus expansion, the required, but possibly failing, adjustment of the rate of saving, W = I”/(I’+I”), to the requirements of the productive cycle

(p. 135, line 20 – p. 135, line 24)  “… the surplus expansion is anti-egalitarian, inasmuch as that expansion postulates that increments in income go to high incomes.  But it also reveals the basic expansion to be egalitarian.”

(page 135, line 25 – page 135, line 26) In addition to the adjustment of savings (fractional surplus incomes, W = I”/(I’ + I”) by migrations, there is a further mechanism of automatic correction: higher selling-price levels.

 (p. 135, line 30 – p. 136, line 3) “… (the) movement of price levels has a double effect: it contracts or expands the purchasing power of monetary income; ad it shifts the distribution of monetary income to the higher or to the lower income brackets.”

 (p. 136, line 4 – p. 136, line 12) higher prices in the initial interval of the surplus phase lead to increases of outlays and incomes, speculative profits, and higher surplus incomes, thus a shift in the distribution of income to higher brackets and, so, in favor of surplus income.

 (p. 136, line 12 – p. 137, line 1, including footnote 192) the equivalent of decreasing the income of lower brackets in the initial interval of a surplus expansion is had by the reduction of purchasing power of the constant monetary income of lower brackets

 (p. 137, line 2 – p. 137, line 12) “… as prices rise, real saving is forced upon each lower group; on the other hand, as prices rise, the consequent increment in speculative profits and so of surplus income is far greater than any greater spending effected by the small numbers in the higher brackets.”

(p. 137, line 13 – p. 137, line 26)  BUT, the mechanism of higher prices forcing an automatic adjustment towards an increasing rate of savings for investment IS CONDITIONED by 1) the adequacy of the quantity of money in circulation, and 2) the increment of monetary income going primarily to the higher brackets as surplus income, i.e. a higher rate of savings in the fraction, W.  There will be no proper adjustment of the rate of savings, W. “… basic income continues to be excessive, and so the basic price level continues to rise indefinitely.”

 (p. 137, line 27 – p. 138, line 13) “The root of the failure of the mechanism is the failure to obtain the anti-egalitarian shift in the distribution of income. … “

A note re stagflation stifling a pure surplus expansion:

The foregoing mechanism (of rising prices in a surplus expansion) 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: then, instead of adjusting the rate of saving to the requirements of the productive cycle, the productive cycle is arrested to find adjustment to the rate of saving.  (CWL 15, 137, lines 13-19)

… unless the increment in total monetary income goes to the higher income brackets and so to surplus income, there will be no adjustment of the rate of saving: the monetary income of the lower groups increases as rapidly as the purchasing power of monetary income contracts; no real saving is forced; and ex hypothesi, there is no anti-egalitarian shift in the distribution of income.  It follows that basic income continues to be excessive, and so the basic price-level continues to rise indefinitely. (CWL 15, p. 137, lines 19-26)

These two types of failure – 1) the failure of higher prices to force saving by lower brackets by reducing purchasing power, and 2) the failure of monetary income to go to the higher brackets  – are interrelated. (CWL 15, p. 137, lines 27-28)

Case B:

The problem of excessive saving in a basic expansion

(page 138, line 13 – page  140, line 22): When insufficient income is moving to the basic final market in  the basic expansion of the pure cycle, because capital investment is tapering off, the associated rate of saving for investment should be decreasing while the rate of expending for consumption should be increasing.

 (CWL 15, p. 138, line 13 – p. 138, line 20) Basic prices fall; initially this affects a favorable increase in the purchasing power of income and an egalitarian shift in the distribution of income.

(CWL 15, p. 138, line 21 – p. 138, line 22)But the egalitarian shift of income is mainly a theoretical possibility.  Units of enterprise take it as a signal to contract.

(CWL 15, p. 138, line 22 – p. 139, line 10) Prices continue to fall. Basic receipts, outlays, incomes, expenditures, receipts again continue to fall

(CWL 15, p. 139, line 10 – p. 139, line 12) Finally surplus income is reduced to the proportion of total income required by the overall process

(page 139, line 120 – page  140, line 20) The lack of adaptation is an inability to distinguish between a relative and an absolute fall of prices.  Deep down, macroeconomists and price theorists don’t understand the significance of prices and their changes. Macroeconomics is insufficiently nuanced.

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 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 is to convert the surplus expansion into a boom (which must be followed out of systematic necessity by a correlative and devastating slump).  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 (“pure surplus income”).  To this we now turn.  [CWL15, 139-140]

• • • Part III – Outline of Traditional Theory’s Lack of Understanding re Artificially Manipulating Interest Rates

      The pure cycle of expansion proceeds in phases.

      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 (manipulating) 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. ¶The simplest manner of attaining a fairly adequate concept of basic income is to divide the economic community into an extremely large number of groups of practically equal income. … In any group i let there be at any given time n_i members; let each member receive an aggregate (basic and surplus) income y_i per interval, so that the whole group receives n_iy_i; finally, let us say that the group directs the fraction w_i of its total income to the basic demand function, so that basic income per interval is given by the equation

      I’ = Σw_in_iy_i

      … and so one obtains for the increment per interval of basic income the simpler equation

      δI’ = Σ (w_iδn_i + n_iδw_i)y_i   ^{Ftnt 189}

      where n_i includes the adjustment due to migration.  We shall consider in turn variations in basic income in virtue of  δn_i  and variations in virtue of  δw_{i .} … Hence, in migrations from low to less-low income groups, most of the increment of individual total income becomes an increment of basic income; but in migrations from high to still higher income groups, most of the increment of individual total income becomes an increment of surplus income.  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; while they may be too distant from the current operations of the economic process to judge, at least they can put their money into the bank or bonds or stocks, and perhaps others there will see how it can best be used.  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. …(and) this fundamental mode of adjustment is complemented by a further mechanism of automatic correction.  (price changes) (CWL 15, 133-134) 

The traditional doctrine of thrift and enterprise looked to the supply of and demand for money to adjust interest rates and the adjusted rates to adjust the rate of saving to the requirements of the productive process.  But it can be argued that a) this view was not sufficiently nuanced in its estimate of the requirements of the productive process, b) that it missed the magnitude of the problem, and c) that it tended to lump together quite different requirements. … [CWL 15, 140, ftnt. 197]

The difficulty with this (traditional) theory is that a.) it lumps together a number of quite different things and b.) it overlooks the order of magnitude of the fundamental problem… [CWL 15,  141]

Rather than repeat what has been said elsewhere, let us simply supply references for the reader:

CWL 15, page 141, line 1 – CWL 15, page 144, line 18

The Ineptitudes in Central Bank Operations

Interest Rates and Payments

The IS-LM, AD-AS Models and the Phillips Curve Correlation……..Sections IS-LM and The Phillips Curve Correlation

• Part IV – Selected Excerpts and Comments Relevant to CWL 15, Section 26, “The Cycle of Basic Income,”  pages 133-44

Section 26 points out for review and correction the disorientation and inadequate macrostatic theory of conventional wisdom with respect to a) tiers (brackets) of income, wealth, and human propensities in the dynamic economic process, b) the effect of divergent flows and their associated price-level changes on the distribution of incomes, c) the effect of interest-rate manipulations on short and long-term projects, d) the concomitance and solidarity of Outlays-Incomes and Expenditures-Receipts, e) the failure to distinguish clearly and grasp the implications of relative vs. absolute price-level changes, and f) resulting conclusions about management of real flows of products, monetary flows of dummy money, interest rates, pricing, and distribution of incomes throughout a phased economic expansion

Traditional Theory’s “feeling” or “sense” – rather than scientific understanding – of the Effect of Interest Rate Changes is mistaken and therefore, misleading; (CWL 15, 133-135) There are factors that are prior to changing interest rates and more effective.

The pure cycle of expansion proceeds in phases to which the money supply and the distributions of  basic incomes going to consumption and surplus incomes for investment must adapt. There is “a further mechanism of automatic correction.”(i.e. price changes) (CWL 15, 133-134)

The foregoing (migrations among strata of incomes) is the fundamental mode of adjusting the rate of saving to the phases of the productive cycle. …(and) this fundamental mode of adjustment is complemented by a further mechanism of automatic correction.(i.e. price changes) (CWL 15, 133-134)

… the mechanism of rising prices in a surplus expansion involves a shift in the distribution of monetary income in favor of the higher income brackets and so in favor of surplus income. (CWL 15, 136)

… in migrations from low to less low income groups, most of the increment in individual total income becomes an increment in basic income; but in migrations from high to still higher income groups, most of the increment of individual total income becomes an increment in surplus income. (CWL 15, 135)

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. (CWL 15, 138)

On the other hand, the egalitarian shift in the distribution of income is, in the main, a merely theoretical possibility. (CWL 15, 138)

Receipts fall, outlay falls, income falls.  The incidence of the fall of income is, in the first instance, upon the entrepreneurial class, and so in the main it is a reduction of surplus income. (CWL 15, 138)

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. (CWL 15, 139)

…, the following conclusions seem justified.  When the rate of saving is insufficient, increasing interest rates affect 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 increments 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, 144)

Falling prices tend to be regarded as a signal that expansion has proceeded too far, that contraction must be the order of the day(CWL 15, 139)

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, 139)

Traditional Theory Mistakenly Lumps Together Different Aspects of the Process; pp. 141-44

The traditional doctrine of thrift and enterprise looked to the supply of and demand for money to adjust interest rates and the adjusted rates to adjust the rate of saving to the requirements of the productive process.  But it can be argued that a) this view was not sufficiently nuanced in its estimate of the requirements of the productive process, b) that it missed the magnitude of the problem, and c) that it tended to lump together quite different requirements. … [CWL 15, 140, ftnt. 197]

The difficulty with this (traditional) theory is that a.) it lumps together a number of quite different things and b.) it overlooks the order of magnitude of the fundamental problem… [CWL 15,  141]

One cannot identify a reduction of basic income (by savings) with an increase in the supply of money (for investment), – (such a reduction is normally a misdirective drain of the basic circuit, not an increase) – for a reduction of basic income is only one source of such supply; moreover, it is neither the normal nor the principal source of such supply; … principally the increase in the supply of money is due to the expansion of bank credit, which is necessary to provide the positive (S’-s’O’) and (S”-s”O”) needed interval after interval to enable the circuits to keep pace with the expanding productive process. [CWL 15, 142]

Conclusions; p. 144

Thus, the general theory of circuit acceleration is that it takes place in a constrained and limited way when quantities of money in the circuits are constant, but without let or hindrance (but not necessarily a runaway) when quantities of money are variable. Finally, provided (D’-s’I’), (D”-s”I”), G vary only slightly from zero, so that their action is absorbed by stocks of goods at the final markets, they exercise a stimulating effect in favor of positive or negative circuit acceleration; otherwise their action pertains either to superimposed circuits of favorable balances of foreign trade and deficit government spending, or else to the cyclic phenomena of booms and slumps.  (CWL 15, 64-65) 

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 increments 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, 144)