Part I. Two economic mechanisms. Two components of concrete relations. Two simultaneous roles for human participants
It is the viewpoint of the present inquiry that, besides the pricing system, there exists another economic mechanism, that relative to this system man is not an internal factor but an external agent, and that the present economic problems are peculiarly baffling because man as external agent has not the systematic guidance he needs to operate successfully the machine he controls. [CWL 21, 109]
What the analysis reveals is a mechanism distinct though not separable from the price mechanism which spontaneously coordinates a vast and ever shifting manifold of otherwise independent choices from demand and of decisions from supply. It is distinct from the price mechanism, for it determines the channels within which the price mechanism works. It is not separable from the price mechanism, for a channel is irrelevant when nothing flows through it. [CWL15, 17] [Continue reading).
[12/9/19] Schumpeter, Canton, Quesnay, Leontieff: … it will be well at once to draw attention to J.A. Schumpeter’s insistence on the merits of the diagram as a tool. (Schumpeter, History 240-43, on the Cantillon-Quesnay tableau.) … First, there is the tremendous simplification it effects. From millions of exchanges one advances to precise aggregates, relatively few in number, and hence easy to follow up and handle. … Next come the possibilities of advancing to numerical theory. In this respect, despite profound differences in their respective achievements, the contemporary work of Leontieff may be viewed as a revival of Francois Quesnay’s tableau economique. Most important is the fact that this procedure was the first to make explicit the concept of economic equilibrium. All science begins from particular correlations, but the key discovery is the interdependence of the whole.… While it is true that a tableau or diagram cannot establish the uniqueness of a system or rigorously ground its universal relevance, it remains that the diagram (of the interconnections of a few precise aggregates) has compensating features that Quesnay’s system of simultaneous equations may imply but does not manifest. … There is the tremendous simplification (a diagram) effects the aims and limitations of macroeconomics make the use of a diagram particularly helpful, … For its basic terms are 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 to ownership (distinct process 3) 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 and 177] [#66]
Diagram of Rates of Flow
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A very expensive macroeconomics textbook having 700-1000 pages would contain a lot of interesting history, a lot of fuzzy psychology, unscientific analysis, and uncertain conclusions. A reader would not gain a clear theory and complete explanation of the dynamics of the real economic process. However, is there not a superior 228-page, far less expensive textbook right in our hands? How about this? Reword the subtitle of CWL 15 from An Essay in Circulation Analysis to A Textbook of Circulation Analysis, and let the professor instruct the serious student to read the book three times, then report back to discuss the following:
- the canons of empirical method
- a scientific, dynamic heuristic
- the technique of implicit definition; explanatory terms defined by the functional relations in which they stand with one another
- velocitous functional unities of scientific and explanatory significance replacing the BEA’s descriptive, commonsense, accountants’ unities
- the structure of the lagged, rectilinear productive process
- money as a dummy invented by man
- the perspective of a hierarchical series of monetary circuits
- how a monetary circulation meets the rectilinear production-and-vending process
- the primary relativities and concomitance in the Diagram of Rates of Flow
- dynamic equilibrium replacing static Walrasian general equilibrium
- the velocity of money in terms of magnitudes and frequencies
- prices are not a given and not requiring explanation; rather prices are in need of explanation
- interpretation of prices, quantities, interest rates in the light of significant explanatory variables
- the pure cycle and its constituent phases in the expansion of the objective economic process
- the abstract primary relativities and concrete secondary determinations in the expansion of the economic process
- the statistical residue and why prediction is impossible in the general case; predicting weather vs. predicting planetary motion
- the significance of investment’s monetary correlate
- the ineptitude of manipulating interest rates
- the explanation of government and foreign-trade imbalances by the dynamics of superposed circuits
- the distinction between efficient cause and formal cause
- distinguishing between self-healing and the effect of interventions
- the intelligibility and explanatory power of the basic price-spread ratio
- Figures 14-1, 24-7, and 27-1 in CWL 15
The student would learn much that is radically different, explanatory, and very useful; and he/she would gain a perspective or framework by which to evaluate and criticize the flawed premises and tenets of conventional textbooks and traditional theories.
We have arranged this Topic into four parts:
- Part I: The Disorientations of Macroeconomists
- Part II: Principles and Precepts of Analysis
- Part III: A New Textbook, Lonergan’s Macroeconomic Dynamics: A Textbook in Circulation Analysis
- Part IV Comments on The Federal Reserve’s Current Framework For Monetary Policy: A Review and Assessment, by Janice C. Eberly, James H. Stock, and Jonathan H Wright.
Part I: The Disorientations of Macroeconomists
One cannot help but admire and be grateful to the Federal Reserve Bank for its Flow of Funds matrices and the National Bureau of Economic Research for its GDP tables. Great information, well done! However, the Fed, the NBER, and the proponents of the DSGE methodology suffer from fundamental disorientations. The NBER’s descriptive, commonsense, national-income accounting must integrate the Fed’s data on credit and to be recast to provide an explanatory systematization of interdependent flows of products and money. Devotees must reorient themselves. (Continue reading)
DSGE is – to many economists – the standard model and method of macroeconomic analysis. See our treatment of the textbooks’ IS-LM, AD-AS models and the Phillips Curve correlation.
The acronym stands for Dynamic (in Newtonian mechanics an external force causes a change to constant velocity, i.e. an acceleration, which may be negative or positive), Stochastic (random, not according to system, probabilistic, unexplained) General (pertaining to the entire economic process), Equilibrium (essentially Walrasian static equilibrium).
Leon Walras developed the conception of the markets as exchange equilibria. Concentrate all markets into a single hall. Place entrepreneurs behind a central counter. Let all agents of supply offer their services, and the same individuals, as purchasers, state their demands. Then the function of the entrepreneur is to find the equilibrium between these demands and potential supply. … The conception is exact, but it is not complete. It follows from the idea of exchange, but it does not take into account the phases of the productive rhythms. … [CWL 21, 51-52] (Continue reading)
N. Gregory Mankiw wrote an article for the Sunday New York Times, 8/11/19, entitled Ties That Bind Inflation and Unemployment. His final paragraph states:
The Fed’s job is to balance the competing risks of rising unemployment and rising inflation. Striking just the right balance is never easy. The first step, however is to recognize that the Phillips curve is always out there lurking.
We have emphasized that the Fed’s responsibilities are a.) to be admonitory and supervisory to the banking system, and b.) to supply the economy with the quantity of money needed for orderly execution of the magnitudes and frequencies of operative payments. And it is the responsibility of the enlightened private and government sectors – not the Fed, because it does not possess sufficiently effective tools – to manage production, employment, and philanthropy properly. By so doing, enterprise and government can effect production, pricing, interest rates, and dividend rates consistent with the opportunities and risks in the system; and they can achieve the full productivity made possible by the invention, gumption, and hard work of free people, yet properly constrained by the state of technology, culture, and resources. Contrary to what Mankiw seems to be approving in his conclusion, it is wrong to assign responsibility to the Fed for adjusting inflation and unemployment in the economic process by artificially manipulating the interest rate. And, despite all the hype about the effectiveness or ineffectiveness of manipulating the rental price of money (i.e. the interest rate), no one has yet developed the ability to separate the effect of self-healing from the positive or the negative, counterproductive effect of interest-rate manipulation. For further perspective, click here for critical treatment of the IS-LM, AD-AS, and Phillips Curve Models, including notes explaining stagflation and the need to transition from a single-circuit analysis to a double-circuit analysis; here, for Notes Regarding FRB Monetary Policy and a Theoretic of Credit; and here for Practical Precepts for Free People – Consumers, Entrepreneurs, Bankers, Investors. Also see Summary of the Argument (CWL 15, 5-6) and The Cycle of Basic Income (CWL 15, 133-44).
The Functional Macroeconomic Dynamics Collaborative
Website: Bernard Lonergan’s Functional Macroeconomic Dynamics
Brian C. Moyer, Director
Bureau of Economic Analysis (BEA)
4600 Silver Hill Road
Washington, DC 20233
Dear Mr. Moyer,
Presently the Bureau of Economic Analysis (BEA) publishes three general versions of the National Income and Product Accounts (NIPA).
- Gross Domestic Product, Current $
- Gross Domestic Income by Type of Income; National Income by Type of Income; and, National Income by Sector …; Current $)
- Gross Value Added by Sector; Current $)
Would it be possible for the BEA staff to develop a fourth which would be explanatory of the production-and-exchange process? Continue reading