“δὶς ἐς τὸν αὐτὸν ποταμὸν οὐκ ἂν ἐμβαίης.” (Heraclitus)

“No man ever steps in the same river twice.”  (translation of Heraclitus)

Each of the 1970’s, 1980s and current 2020s has featured its own unique and nuanced combinations of circulating flows of products and money in phases of normative expansion, divergent boom; and corrective contraction. The flows of these decades are not all identical flows which anyone can simply reference to justify a present shallow opinion.

The Wall Street Journal of Monday, August 7, 2023 included Alan S. Blinder’s reply to John H. Cochrane.  (See the two posts below on this Home Page.)

Mr. Blinder says, ignoring the factor of the money supply and monetary reserves:

First, Mr. Cochrane claims the supply-shock theory is about relative prices (that’s true), and that a rise in some relative price (e.g. energy) “can’t make the price of everything go up.” This is an old argument that monetarists started making a half-century ago, when the energy and food shocks struck.  It has been debunked early and often.  All that needs to happen is that when energy-related prices rise, many other prices, being sticky downward, don’t fall.  This is what happened in the 1970’s, 1980s and 2020s.

Comments: 

• There is a component of energy throughout the complex, nuanced productive process and, depending on its great or small importance in the production cost of a particular good or service, the cost-price of energy will affect the production cost of everything to some extent.  And the effect will ripple through production costs, selling prices, tiers of income levels, and relative vulnerabilities and invulnerabilities.
• If the money supply doesn’t change, or people don’t draw on reserves, the relative price of integral, energy-containing final products gets squeezed upward.  It’s the squeezing of a balloon.  If people draw on reserves or borrow, the effect on relative prices may be mitigated by the tradeoff of more debt or lower reserves vs. higher prices. 
• In another context Lonergan addressed the significance of how much money enters the system and through what channels it should enter.

The foregoing Section 13 (entitled Rates of payment and transfer) defined two circuits of outlay, income, expenditure, receipts, a pair of crossovers, and four pairs of transfers between the redistributive function and the demand and supply functions. The present section is concerned to watch the circuits in motion, and more particularly to inquire into the conditions of their acceleration. The inquiry involves three steps: first, one asks what is the possibility of circuit acceleration when the crossovers balance and each of the four pairs of transfers cancel, so that the quantity of money in each of the circuits remains constant. [that is, when (S’-s’O’), (S”-s”O”), (D’-s’I’), (D”-s”I”), and G are each zero]. Secondly, we ask what is the possibility of circuit acceleration when the crossovers balance, transfers to the demand functions balance, but transfers to the supply functions do not [that is, when (S’-s’O’) (S”-s”O”), are positive or negative but (D’-s’I’), (D”-s”I”) and G remain zero]; thirdly, one asks what happens if the crossovers or the transfers to demand do not cancel [that is when none of these is zero].  (Continue reading at CWL 15, 56)

• Any statement about the 1970’s, 1980s and 2020s must consider fully all the nuances of the economic process in the 1970’s, 1980s and 2020s. Many factors other than an energy supply shock, may have been in play.The nuances of the objective, always-current, purely-dynamic economic process, known as Functional Macroeconomic Dynamics and as Macroeconomic Field Theory, include:
  • Scientific explanation of the current dynamic process by the relations of functional velocities among themselves rather than mere description by accounting’s commonsense profit-and-loss categories
  • The precise analytical distinctions between functional activities – point-to-point, point-to-line, point-to surface, point-to-volume, and higher – upon which a fully explanatory superstructure may be built
  • The concomitance of a) Outlays and Expenditures, b) basic Incomes and the requirements of the particular phase of the pure cycle of expansion, and c) government receipts and expenditures in the two circuits
  • The conjoinment of outlays and employment
  • The state of capacity usage and of the potentiality from invention and innovation.
  • Scarcity of materials and workers
  • The present rate of productivity in both circuits
  • The quantities prevailing in the variables of the lagged technical accelerator

  k_n [f’_n(t-a)-B_n] = f”_n-1(t) – A_n-1  (see CWL 15, 37)

  • The monetary requirements of the current curved phase of the current pure cycle of expansion – static phase (non-expansion), proportionate-expansion phase, surplus-expansion phase, basic-expansion phase, higher static phase (non-expansion)
  • The curvatures of the accelerations in the circuits of the current pure cycle of expansion
  • The quantity of money circulating in the operative circuits vs sitting idle in the speculative poole
  • The possible inflation or deflation away from an intrinsic value of the market values of stocks and bonds stemming from speculative optimism or pessimism
  • The possible dealings of the operative basic and surplus supply and demand functions through the four pairs of channels to and from the Redistributive Function 
  • The current distribution of income and wealth among tiers of income-plus-wealth and the tiers’ respective propensities to consume, invest, or gamble
  • The consequences of possible migrations up and down in the tiers of income-plus-wealth
  • Foreign trade affects
  • Government budgetary surplus or deficit affects on the accumulated government debt or surplus
  • The ineptitude of Federal Reserve adjustments of Smith-to-Jones interest charges and payments
  • The ineptitude of Federal Reserve open-market operations uncorrelated with the requirements of the magnitudes and frequencies of the productive process
  • The curvature of expansion and contraction of the cyclical pure surplus income ratio, I”/(I’+I”)
  • The expansion and contraction of the basic price-spread ratio at a point in a pure cycle of expansion; P’/p’ = a’ + a”R

   

Lonergan’s basic terms are interdependent velocities.  There is a shift to dynamics.  The creative shift is to the Leibnitz-Newtonian focus on comparative velocities and to the curvatures of their changes (accelerations).

In Lonergan’s circulation analysis, the basic terms are rates – rates of productive activities and rates of payments.  The objective of the analysis is to discover the underlying intelligible and dynamic (accelerative) network of functional, mutually conditioning, and interdependent relationships of these rates to one another.  [CWL 15  26-27  ftnt 27]

Taking into account past and (expected) future values does not constitute the creative key transition to dynamics. … 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]

An ‘accountant’s unity’ … is a category used in (conventional, corporate) accounting.  For Lonergan, (conventional) accounting generally denotes an enterprise within common sense which uses descriptive, as contrasted with explanatory terms (on these terms see Insight 37-38/61-62, 178-79/201-3, 247-48/272-73).  Insofar as that is true, the accountant’s unity is not an adequate index for the normative, explanatory analysis of the productive process. [CWL 15, 26, ftnt 26]

On this (methodological) model (i.e. concomitance by abstract correlation and implicit definition) circulation analysis raises a large superstructure of terms and theorems upon a summary classification and a few brief analyses of typical phenomena.  Classes of payments quickly become rates of payment standing in the mutual conditioning of a circulation; to this mutual and, so to speak, internal conditioning there is added the external 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 by productive rhythms of goods and services………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…CWL 15, 18

The double-circuited economic process is understood as a threefold process.

(The Diagram’s) basic terms are (implicitly) 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 (distinct process 3) to ownership  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. … So there is to be discerned a threefold process in which a basic stage is maintained and accelerated by a series of surplus stages, while the needed additions to or subtractions from the stock of money in these processes is derived from the redistributive area. … it will be possible to distinguish stable and unstable combinations and sequences of rates in the three main areas and so gain some insight into the long-standing recurrence of crises in the modern expanding economy. [CWL 15, 53-4 and 177] 

On this (methodological) model (i.e. concomitance by abstract correlation and implicit definition) circulation analysis raises a large superstructure of terms and theorems upon a summary classification and a few brief analyses of typical phenomena.  Classes of payments quickly become rates of payment standing in the mutual conditioning of a circulation; to this mutual and, so to speak, internal conditioning there is added the external 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 by productive rhythms of goods and services………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…CWL 15, 18

An important factor among the nuances is the distribution of incomes with their propensities to consume or invest.

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. … …  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. [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 (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,  141-144]

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, 143-44)

Second, Mr. Cochrane claims, the supply-shock theory “predicts that the price level, not the inflation rate, will return to where it came from – that any inflation should be followed by a period of deflation.”  No.  Not unless the prices of goods afflicted by supply shocks return to the status quo ante and persistent inflation doesn’t creep into other prices.  Neither has happened in this episode.

Comments:

Mr, Blinder tries to explain everything by a reference to individual products rather than functional classifications and a double-circuited, credit-centered system of interdependent aggregate flows of products.

Also, he does not include any consideration of a) the tiers of income, wealth and propensities to consume or invest, and b) the asymmetry of changes of consumption resulting from migrations in the lower vs. the higher tiers.

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)

Also, the egalitarian shift in the distribution of income is, in the main, a merely theoretical possibility.

(In the basic expansion) … There is 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 is, 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, 138-39]

Mr. Blinder verbalizes, “the prices of the goods afflicted by supply shocks return to the status quo,” and “persistent inflation doesn’t creep into other prices,”

Prices are not animate.  They do not act on their own.  And inflation itself is not animate; it doesn’t creep. 

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 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]  

DP’ and DP” simply indicate what might be described metaphorically as the inertia of the quantity process of goods and services in its response to acceleration initiated in the circulatory process of payments.  Rapid increases or decreases in the (monetary) circulatory process have not a proportionate effect in the (production) quantity process but are in part absorbed by positive or negative price increments.  Thus booms are notoriously inflationary and slumps deflationary.  Hence DP’ and DP” are best taken as indices of divergence between circulatory and quantity phases. (CWL 21, 134)

In the context of treating a boom and slump, Lonergan remarks: 

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]

At the root of the depression lies a misinterpretation of the significance of pure surplus income. In fact it is the monetary equivalent of the new fixed investment of an expansion…..our culture can not be accused of mistaken ideas on pure surplus income as it has been defined…; for on that precise topic it has no ideas whatever………However the phenomena referred to by …”pure surplus income” are well known.  Entrepreneurs are quite aware that there are times of prosperity in which even a fool can make a profit and other mysterious times in which the brilliant and the prudent may be driven to the wall……….Thus pure surplus income may be identified best by calling it net aggregate savings and viewing them as functionally related to the rate of new fixed investment [CWL 15 152-53]

Also, consider again:

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)

Lonergan insists that the mechanism of the pricing system does not furnish economists with distinctions among significant variables of aggregate surplus (or producer-goods) and basic (or consumer-goods) supply and demand with their determinate yet flexible velocities and accelerations, any more than Galileo Galilei’s discrete measurements of distances and times at the Tower of Pisa of themselves provided the law of the acceleration of falling bodies…….the lack of ultimacy that Lonergan ascribes to prices and price theory can scarcely be overemphasized. (CWL 15, Editors’ Introduction, xlvi-xlvi)  

The foregoing Section 13 (entitled Rates of payment and transfer) defined two circuits of outlay, income, expenditure, receipts, a pair of crossovers, and four pairs of transfers between the redistributive function and the demand and supply functions. The present section is concerned to watch the circuits in motion, and more particularly to inquire into the conditions of their acceleration. The inquiry involves three steps: first, one asks what is the possibility of circuit acceleration when the crossovers balance and each of the four pairs of transfers cancel, so that the quantity of money in each of the circuits remains constant. [that is, when (S’-s’O’), (S”-s”O”), (D’-s’I’), (D”-s”I”), and G are each zero]. Secondly, we ask what is the possibility of circuit acceleration when the crossovers balance, transfers to the demand functions balance, but transfers to the supply functions do not [that is, when (S’-s’O’) (S”-s”O”), are positive or negative but (D’-s’I’), (D”-s”I”) and G remain zero]; thirdly, one asks what happens if the crossovers or the transfers to demand do not cancel [that is when none of these is zero].  (Continue reading at CWL 15, 56)