Paul Romer and Bernard Lonergan made revolutionary contributions to humanity. Each achieved, consistent with his own purpose and scope, brilliant formulations of the economic process. Romer’s analysis focuses on endogenous, exponential growth over the very long run. Lonergan’s, general, universal, and more comprehensive analysis specifies the conditions of dynamic equilibrium throughout all the phases of the many wavelike expansions which comprise Romer’s very long run.
Romer’s “proof of the endogeneity of growth” in the very long run is a brilliant, logically consistent, mathematically virtuosic quod erat demonstrandum. Because he deals in the very long run, his equations are not isomorphic with, and explanatory of, the transitional functionings of the always current, purely dynamic, economic process. He forthrightly admits that he bypasses “transient,” or “transitional,” dynamics. On the other hand, Lonergan’s explanatory theory is a general and universal theory of economic equilibria and disequilibria, currently applicable at all times. It specifies the normative equilibrium among interdependent flows, both currently and throughout static and expansionary phases; and it explains rather than merely postulates the situations colloquially called booms and slumps, bubbles and busts, prosperity and depression, inflation, and deflation, etc.
One might find oneself going back and forth between guarded criticism and effusive praise of Romer. In the end, this writer always has high praise for Romer.
Romer is master of obvious. Everyone knows that human genius is the primary driver and the sine qua non of economic advancement. His conclusions, though consisting of a brilliant set of relations, are based on selective assumptions so as to assure these conclusions.
His explanatory conjugates of the interdependent activities of mind, bodily coordination, and machines provide a plausible account of how efficiently-causal humans effect economic growth in the very long run, but they do not explain the dynamic functioning of the differentiated rhythms of production, payments, and credit.
His Cobb-Douglas linear equation of the first degree, with the exponents conveniently adding to 1 (α, β, 1-α-β) forces constant returns to scale.
His assumption of the linearity of the growth of a pool of knowledge (S83-84), which he admits is made for analytical convenience, is questionable. (S84)
Romer gets thrown off track in explanation of the economic process by focusing on firms and households rather than on explanatory functionings. We might characterize his theory as talent-distribution-ism or inter-firm-ism rather than inter-function-ism. He uses a Cobb-Douglas production formulation of the interactions between human talent and producer durables assumed to be confined to one-trick “sectors” or to separate departments of integrated firms. While his assumptions are appropriate and beneficial for simplification and pedagogy in his demonstration, in his search for a very-long-run equilibrium he is forced by his talent-ism and interfirm-ism to make questionable assumptions regarding linearity, temporality, capital replacement, capital expansion, wage structures, uniform capital efficiencies, and productive coefficients.
Major opportunities for advance occur in clusters rather than in straight lines, and they are implemented in clusters called “revolutions,” like the Industrial Revolution and the Applied Science Revolution. The fertility of the vast field of existing human knowledge and natural resources depends at any time on chance constellations. Major opportunities occur from time to time. Sometimes the time is more in fullness and the orchard’s fruit is very ripe. There are circumstances favoring clusters of innovation and expansion called “revolutions.”
The emergence both of new ideas and of the concrete conditions necessary for their practical implementation forms matrices of interdependence: any objective change gives rise to series of new possibilities, and the realization of any of these possibilities has similar consequences; but not all changes are equally pregnant, so that economic history is a succession of time periods in which alternatively the conditions for great change are being slowly accumulated and, later, the great changes themselves are brought to birth. [CWL 15, 36]
… a massive long-term acceleration is a massive development of surplus activity. Further, one is not to think of this increment in Q” as concentrated in firms of certain types. The distinction between basic and surplus is not a material nor a proprietary but a functionaldistinction. There are types of enterprise that in themselves are indifferently basic or surplus … [CWL 15, 118]
The effect on the rates of production of consumer goods will depend on whether the capital goods are for mere replacement and maintenance, expansion of existing types of capital goods (widening), or production of newer or more efficient capital goods (deepening) to either replace existing types or add to the stock of capital goods. In the case of more efficient capital goods, the technical coefficients change and the production process is calculated on a new basis. The gas-powered tiller replacing the horse–drawn tiller puts production on a new basis.
The appearance or disappearance of men and women of inventive and innovative genius is not linear.
With his admitted limited purpose and narrow scope, Romer must bypass analysis of the transitional wavelike surges of phased growth in an economy a) whose laws allow private property, b) whose participants are free to get and spend as and when they choose, and c) whose analytically distinct productive functionings are performed in sequences – rather than all together – requiring an expansion of sound credit to bridge the gap between payments made and payments received..
Definite Praise, grounded in a positive attitude and an inclination to be grateful:
Romer was totally forthright in crediting his predecessors, in stating and qualifying his simplifying assumptions, and in assessing his own work. There was no sleight of hand. Romer was totally honest and genuine.
Romer thematized and formulated the applications of human intelligence and skill as factors of production. He articulated what others might have vaguely intuited but did not have the power of insightful intelligence and the mathematical chops to formulate.
Romer’s proof of Everyman’s Theorem– that human genius and profit-motivation are the generators of human advance – is mathematically virtuous and virtuosic. He has carefully related equations for quantities and prices on three levels. Many complicated equations connect, interweave, and cohere to constitute a coherent system. He has provided clarity. One who labors to reimagine the images underlying his insights is richly rewarded with a vivid picture of how the economic process can advance.
He developed a consistent and coherent set of formulae, which gives one a clear formulation of How and Why profit-motivated, and successful research and development can and does generate economic advancement endogenously. Though his framework must assume constants, linearity and uniform use of capital, he has nevertheless successfully demonstrated his thesis that profit-motivated innovation is the endogenous generator of progress. His demonstration of possibility may be called a “proof” of possibility and is verified, in the large and in the very long run, by the obvious facts of progress.
Romer provided, for the betterment of mankind, practical precepts to policy-makers in all nations of the world. He supplies clear precepts to governments regarding subsidizing pure and applied research. The honoring of Romer’s precepts is of huge importance. The importance to humanity of his advice must not be underestimated. (click here, and here.)
His work is explanatory rather than merely descriptive. He employed implicit definition; in his equations, his terms define his relations and his relations define his terms. His work is, therefore, purely relative: he makes assumptions, but his premises and deductions are not implausible. Rather he formulates and demonstrates a coherent proof, when those before him had only notions or vague intuitions.
“Previous macroeconomic research had emphasized technological innovation as the primary driver of economic growth, but had not modeled how economic decisions and market conditions determine the creation of new technologies. ‘[NobelPrize.org, Romer and Nordhaus: Press Release, 2018]
Though not as explicitly dynamic as one would like, his treatment is, in fact, long-run dynamic. The economic activities within and between his “sectors” constitute functional flows of products; and, because flows are rates per interval, his treatment is dynamic.
He developed a new interrelated set of explanatory conjugates, reminding us of the giants of physics – Newton, Clerk-Maxwell, Ohm, and Faraday. In Romer’s case the new conjugates are human capital, human skills, and producer durables rather than land, labor, and producer durables. He discovered new explanatory terms and relations.
By implication he points out the reason people had to stand in bread lines in the communist Soviet Union while people in the free United States could roam through supermarkets offering a bewildering variety of foods.
Lonergan scientifically explains rather than describes the always current, purely dynamic, concrete economic process.
Lonergan’s more general formulation comprehends
- analytically distinct explanatory functionings, rather than accountants’ descriptive commonsense accounts
- the lagged, technical structure of the productive process and its accumulations
- how additional money should enter the system through (S’-s’O’) and (S”-s”O”) to the supply function to finance expansionary productive activity
- how money should circulate
- a magnitude and frequency theorem of the velocity of money
- gaps in time between the initiation of production and the final sale, and gaps in time between the manufacture of producer durables and the accelerated manufacture of consumer goods
- intrinsic cyclicality of a lagged process
- dynamic equilibrium constituted by the balance of flows within and between different levels.
- consumer participation and decisions distinct from entrepreneurial decisions
Lonergan discovered a new field–theory of macroeconomic dynamics. He discovered the immanent intelligibility, i.e. the formal cause of the process.
Paraphrasing [CWL 21, 6-7]: Lonergan moved macroeconomics back to premises more remote than Walrasian statics, microeconomic price theory, neoclassical macroeconomics and Keynesian macroeconomics; he developed explanatory formulae quite unlike others’, and though he did not impugn them, neither was he very interested in them; casually and incidentally combinations of prices and quantities turn up as particular coincidental cases in an enlarged and radically different field. … Lonergan discovered a new field–theory of macroeconomic dynamics to make aggregate, mutually-defining, velocitous functionings the basic interdependent variables; and as Newton transformed the formulation and interpretation of Kepler’s laws, so Lonergan transforms the neoclassical and Keynesian laws of how the economy actually functions. … He achieved a scientific generalization of the old political economy and of modern economics that yields the new political economy which we need. … Plainly the way to settle disputes about the immanent intelligibility of the economic process is through a more general, explanatory, and sublating dynamics of implicitly-defined economic functionings.
Lonergan systematizes the meeting of the monetary order with the productive order. He correlates the temporal, functional interdependencies of the dynamic productive process with the circulations of money required for the continuity and equilibrium of the process.
Lonergan explains banking and credit, trade imbalances, and fiscal mismanagement. Within Lonergan’s Redistributive Function, with its vertical and horizontal transfer arrows out and in, we locate several distinct items and operations which wind up influencing the diagonal operative functional flows: a.) money creation by The Central Bank and the banking system, b.) financing of productive activities through (S’-s’O’) and (S’-s”O”) to supply, c) financing of purchasing through (D’-s’I’) and (D”-s”I”) to demand, d.) management of liquidity balances of individuals, insurance companies, banks, retirement programs and prudent units of enterprise, e.) speculative gambling on stocks, bonds, real estate, and art, f.) a pass-through for government taxes and expenditures, and g.) the financing of foreign trade.
Lonergan makes it perfectly clear to all that the Central Bank and the banking system have the responsibility of a) supplying more and more money as expansion requires, and b) monitoring themselves and their clients to avoid the granting of excess credit. Also, if the banker-producer combination agrees to an interest rate greater than the intrinsic growth rate and the intrinsic macroeconomic interest rate, the effect of the greater difference is to force contractions and layoffs. (in general, excess begets corrective forces by systematic necessity)
Banks are not there to “force their money upon people,”4 nor “do they congratulate themselves if they are loaned up.”5 A banking committee s not “an automaton” but understanding and attentive to purpose and situation, “ judging chances of success of each purpose and, as means to this end, the kind of man the borrower is, watching him as he proceeds …”6 “It should be observed how important it is for the system of which we are trying to construct a model, that the banker should know, and be able to judge, what his credit is for and that he should be an independent agent. To realize this is to understand what banking means.”7 “the banker’s function is essentially a critical, checking, admonitory one. Alike in this respect to economists, bankers are worth their salt only if they make themselves thoroughly unpopular with governments, politicians and the public. This does not matter in times of intact capitalism. In the times of decadent capitalism, this piece of machinery is likely to be put out of gear by legislation.”8 McShane, Philip (quoting Joseph Schumpeter’s Business Cycles I and II) Implementing Lonergan’s Economics, in The Lonergan Review, Culture Science and Economics, Vol. III, No 1, Spring 2011, Seton Hall University, pp. 196-204
Re taking sides:
Perhaps tardily, we take time to acknowledge that the two works were written at less or more adequate levels of abstraction and with different purposes and goals. Therefore, the two works exhibit obvious differences in scope and explanatory generality. Only after careful consideration and judgment of purpose, scope, the propriety of assumptions, the level of abstraction, the coherence of equations, and the comparison of scientificness and explanatory power, may we draw conclusions regarding relative merit. But our purpose herein is not to rate and reward; it is simply to learn an explanatory and critical macroeconomics by comparing the similarities and contrasting the differences in two brilliant essays.
No one having any prejudicial preference for either Romer or Lonergan should leap to any mindless defense or mindless criticism. We seek only to advance in understanding and truth, not to praise or defend, out of an instinct of tribal loyalty or an act of professional self-preservation a colleague in our school, a fellow proponent of our ism, or a brother in our psychopolitical, religious, cultural or ethnic tribe.
Romer had a narrow purpose and scope: to formulate Endogenous Technological Change in an equilibrium of balanced exponential growth. With his assumptions and relations, he did so brilliantly. He plowed new ground and gave sound precepts to the world. Lonergan had a comprehensive scope: to discover an explanation of the entire objective process independent of human psychology.
Both Romer and Lonergan made brilliant, revolutionary contributions to humanity. Both achieved, consistent with their purpose and scope, brilliant formulations of the concrete economic process. Lonergan’s Functional Macroeconomic Dynamics is more general and at a higher level of abstraction. His analysis includes real analysis of the structure of always current production functionings and of the always current circulation of money to buy what is produced. It is a general field theory and universally applicable to any exchange economy. For actual management of the economic process, it is a more useful systematics of the dynamics of the flows of products and money. It explicates macroequilibria that are more fundamental than the microequilibria assembled by Walras and are the conditions of a properly functioning economy,
… Lonergan was seeking the explanatory intelligibility underlying the ever-fluctuating rhythms of economic functioning. … When all was said and done the relations, and the terms they implicitly defined, were markedly different from either the terms of ordinary business parlance or the terms of neoclassical and Keynesian economic theory. … Hence, just as a mathematical equation may be said to be the most adequate expression of purely intelligible relations among explanatory terms in certain instances – for example, Einstein’s gravitational field tensor equations – something closely akin to Lonergan’s (equations and) diagram seems necessary for the realm of dynamic economic functioning. [CWL 15, 179]
Lonergan … was seeking the explanatory intelligibility underlying the ever-fluctuating rhythms of economic functioning. To that end he worked out a set of terms and relations that ‘implicitly defined’ that intelligible pattern. … Moreover, not only did Lonergan’s terms differ, but he also indicated that these aforementioned terms (of neoclassical and Keynesian economic theory) were permeated, as were the terms of Newton’s theory of gravitation, with descriptive, nonexplanatory residues. [CWL 15, 179-80]
Both Romer and Lonergan explain the economic process by interdependent, mutually-defining explanatory conjugates. Lonergan’s terms are flow velocities of interdependent productive and monetary functionings. The functionings are defined by the functional relations in which they stand with one another. Likewise, though Romer’s functionings are the “applications” of capabilities by human agents, he winds up with a purely relational system of these functional applications on three levels of functional activity: R&D, manufacture of producer durables, and production of consumables. He does however fall prey to the psychology of utility, indifference, time preference, subjective discount factors, and elasticities which do not constitute the immanent intelligibility of the theory prior to human psychology.
our inquiry differs radically from traditional economics, in which the ultimate premises are not production and exchange but rather exchange and self-interest, or later, exchange and a vaguely defined psychological situation. Our aim is to prescind from human psychology (so) that, in the first place, we may define the objective situation with which man has to deal, and, in the second place, define the psychological attitude that has to be adopted if man is to deal successfully with economic problems. Thus something of a Copernican revolution is attempted: instead of taking man as he is or as he may be thought to be and from that deducing what economic phenomena are going to be, we take the exchange process in its greatest generality and attempt to deduce the human adaptations necessary for survival. [CWL 21,42- 43]
(Lonergan) approaches the focus armed with precise analytic distinctions between basic and surplus activities, outlays, incomes, etc. [CWL 21, xxvi]
The point-to-line and higher correspondences are based upon the indeterminacy of the relation between certain products and the ultimate products that enter nto the standard of living. … The analysis that insists on the indeterminacy is the analysis that insists on the present fact: estimates and expectations are proofs of the present indeterminacy and attempts to get round it; and, to come to the main point, an analysis based on such estimates and expectations can never arrive at a criticism of them; it would move in a vicious circle. It is to avoid that circle that we have divided the process in terms of indeterminate point-to-line and point-to-surface and higher correspondences. [CWL 15, 27-28]
It would be great if Romer and all professional macroeconomists read Lonergan, acknowledged his many worthwhile points, and were moved to compliment and communicate his scientific macroeconomics.
Also, it is possible for the economy to experience a deepening yet remain in a static phase if the productive rates of the liquidations equal the productive rates of the deepenings. See section on Additional or More Efficient Capital Equipment (p. 109 as of 7/14/12)
Lonergan held the diagram to have both explanatory and heuristic significance. First, then, the later versions of the Essay in Circulation Analysis text draw ever-greater attention to the fact that Lonergan was seeking the explanatory intelligibility underlying the ever-fluctuating rhythms of economic functioning. To that end he worked out a set of terms and relations that ‘implicitly defined’ that intelligible pattern. When all was said and done the relations, and the terms they implicitly defined, were markedly different from either the terms of ordinary business parlance or the terms of neoclassical and Keynesian economic theory. Moreover, not only did Lonergan’s terms differ, but he also indicated that these aforementioned terms were permeated, as were the terms of Newton’s theory of gravitation, with descriptive, nonexplanatory residues. Hence, just as a mathematical equation may be said to be the most adequate expression of purely intelligible relations among explanatory terms in certain instances – for example, Einstein’s gravitational field tensor equations – something closely akin to Lonergan’s diagram seems necessary for the realm of dynamic economic functioning. So, for example, the existence and manner of dynamic mutual interdependence of the two circuits of payment, basic and surplus, is not adequately expressed either by descriptive terms (since this pattern does not directly relate to the senses of anyone operating in a common-sense way in a concretely functioning economy) nor by the series of (simultaneous) equations that do not explicitly manifest the interchanging of ‘flows.’ CWL 15, 179