Author Archives: Functional Macroeconomic Dynamics

Kevin Warsh, Bernard Lonergan; The “Real Economy” and The “Operative Circuits”

Kevin Warsh appeared on Bloomberg Surveillance this morning. He tends to be in agreement with much of what Lonergan has said; and Kevin could modify, refine, and buttress his arguments by studying Lonergan’s Macroeconomic Dynamics: An Essay in Circulation Analysis. Kevin properly speaks of the “real economy”; Lonergan uses the phrase “operative circuits,” and he illustrates these in his Diagram of Rates of Flow. Both persons understand the risk of excess new money causing inflation in either the real economy or in secondary financial-asset values, depending on how the new money circulates.

real analysis (is) identifying money with what money buys. … And that is the source of the problem in real analysis.  If you want to treat money that doesn’t make a difference, you can have a beautiful liberal monetary theory.  But it doesn’t say the way the thing works. [CWL 21, Editors’ Introduction, xxviii  quoting Lonergan]  

The (explanatory) channels of circulation replace the overall dominance claimed for general equilibrium theory, … More positively, the channels account for booms and slumps, for inflation and deflation, for changed rates of profit, for the attraction found in a favorable balance of trade, the relief given by deficit spending, … [CWL15, 17]  

… 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]  

Explanatory Macroeconomic Dynamics; Relevant In Any Instance

There are five figures below from CWL 15:  The single figure on the left represents the interrelations of interdependent Monetary Flows; and the figure contains the important condition of dynamic equilibrium: G = c”O” -i’O’ = 0.  The four figures stacked on the right demonstrate aspects of the productive phases constituting a Pure Cycle of Expansion. The bidirectional arrows uniting the two sides signify that the dynamic equilibrium among interdependent flows specified on the left is to be achieved consistently throughout the long-run expansion represented on the right.  This condition of dynamic equilibrium is that the crossover flows between the two interacting circuits must continuously balance even as they continuously vary in magnitude in the succession of phases constituting the expansionary process.  Just as the general laws of simple parabolic or pendular motion are explanatory and applicable to any particular instance of initial angle and velocity, so a) the primary relativities of productive and monetary flows, and b) the primary differentials of long-term expansion explain the economic process, and are normatively relevant in every particular instance.  All five diagrams are unitary.  Each and every velocitous and accelerative flow of products and money has proximate or remote explanatory aspects embedded in all five diagrams. (Continue reading)

Zephyrs and Pandemics

Functional Macroeconomic Dynamics acknowledges and affirms a non-systematic manifold of secondary determinations (such as prices and quantities), a Canon of Statistical Residues, and the impossibility of prediction in the general case.  However, FMD affirms the existence of both human intelligence and the abstract, primary, immanent intelligibility of the objective, dynamic economic process.  It is this abstract, primary, immanent intelligibility by which the process must always be understood so as to be properly managed.

Knocking a pendulum slightly out of its existing oscillation does not necessitate a search for a new theory of the pendulum in order to correct the mishap.  The abstract theory of the pendulum in Newtonian mechanics still applies; the abstract intelligibility of the pendular motion is always relevant, in any instance, in any configuration of initial angle and initial velocity.  The theory still applies, though the motion may be on a new basis determined by new initial conditions or boundary values. Continue reading

Field Theory in Physics and Macroeconomics

We hope to inspire serious graduate students of economics a) to seek and achieve an understanding of “Macroeconomic Field Theory,” b) to verify empirically Lonergan’s field relations,  and c) to use the explanatory field relations as the basis of influential scholarly papers.

We trace developments

  • in physics from Newtonian mechanics to modern field theory, and
  • in economics from Walrasian supply-demand economics to purely relational, Modern Macroeconomic Field Theory.

Key ideas include a) abstraction and implicit definition as the basis and ground of invariance in both physics and macroeconomics, b) the concept of a purely relational field, c) immanent intelligibility and formal causality, and d) the canons of parsimony and of complete explanation. We highlight some key ideas: (continue reading)

Elements of The Analysis

Our aim is to prescind from human psychology 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]

Taking into account past and (expected) future values does not constitute the creative key transition to dynamics.Those familiar with elementary statics and dynamics will appreciate the shift in thinking involved in passing from equilibrium analysis…to an analysis where attention is focused on second-order differential equations, on d2θ/dt2, d2x/dt2, d2y/dt2, on a range of related forces, central, friction, whatever….. What is significant is the Leibnitz-Newtonian shift of context. [McShane 1980, 127]

A distinction has been drawn between description and explanation.  Description deals with things as related to us.  Explanation deals with the same things as related among themselves.  …  description supplies, as it were, the tweezers by which we hold things while explanations are being discovered or verified, applied or revised. … [CWL 3, 291/316]

again, as to the notion of cause, Newton conceived of his forces as efficient causes, and the modern mechanics drops the notion of force; it gets along perfectly well without it.  It thinks in terms of a field theory, the set of relationships between n objects.  The field theory is a set of intelligible relations linking what is implicitly defined by the relations themselves; it is a set of relational formsThe form of any element is known through its relations to all other elements.  What is a mass?  A mass is anything that satisfies the fundamental equations that regard masses.  Consequently, when you add a new fundamental equation about mass, as Einstein did when he equated mass with energy, you get a new idea of mass.  Field theory is a matter of the immanent intelligibility of the object. [CWL 10, 154]


Modern Monetary Theory Fails to Qualify as Scientific Macroeconomics

Scientific macroeconomics, if it is to be genuinely scientific, must not be contaminated by human psychology.  Gustav Kirchhoff’s laws of the electric circuit do not incorporate the psychology of the human who operates the levers or switches.  So, Lonergan, the scientist, strove to discover the purely relational, purely functional laws of the circuits of the objective economic process.  Unfortunately, many proponents of Modern Monetary Theory exhibit sentiments and inclinations favoring a totalitarian bureaucracy for the management of fiscal and monetary affairs. Their purported science contains some valid assertions, but is not a coherent set of objective laws to which participants must adapt, regardless of sentiment; rather MMT is an admixture of several ideological and psychopolitical sentiments transformed into a contaminated set of mandates for the management of fiscal and monetary affairs.  The tenets of MMT fail to constitute a fully explanatory theory of macroeconomic dynamics. (to continue reading, click here)

The Relativistic Invariant: The Ideal Pure Cycle at the Root of the Aberrant Trade Cycle

The heart of the normative theoretical framework that can actually explain business and trade cycles is what (Lonergan) calls the ‘Pure Cycle’ (§10, §24, 114).  This cycle generalizes into clearly articulated relationships the ideal phases characteristic of major economic transformations as they depart from a stationary phase and move through phases first of surplus expansion and then of basic expansion, only to return to a new stationary phase. … (CWL 15, Editors’ Introduction, lxiii)  (Continue reading)

Why and How the Basic Expansion Fails to be Implemented

In the ideal pure cycle, the long-term expansion proceeds from a static phase through a proportionate-expansion phase , then through a surplus-expansion phase, then through a basic-expansion phase, and finally into a higher static phase.

At (the beginning of a basic expansion) an economic system is confronted with an intrinsic test. It success will be established if it can complete the major basic expansion and – without mishap, without inflation, without unemployment, without a break in confidence –  make its way serenely into the haven of the stationary state.  I mean of course, not the stationary state of mere backwardness, not the stationary state of stagnation when a disastrous crash follows on an earlier apparent triumph, but the stationary state that preserves all the gains of the preceding major expansions.  It is (then) content to produce their gains at a constant rate.  Its duration may be short or long, for in each case it must wait until such time as further new developments are grasped by human intelligence and eventually become practically conceived possibilities. [CWL 15, 80] (Continue reading)

Two Summaries in Functional Macroeconomic Dynamics

.I.   Summary of the Analysis:  Heuristic, Observations, and Discoveries

.II.  Summary of the Argument (verbatim from CWL 15, 5-6)

.III. Supplement to the Summaries

(Continue Reading)