FMD’s Take on Greg Mankiw’s Take on Modern Monetary Theory

Contents:

  • .I. Introductory
  • .II. The “legal” basis of our criticism; the “laws” of the process
  • .III. Key objections to Modern Monetary Theory
  • .IV. Observations re “A Skeptic’s Guide to Modern Monetary Theory”
  • .V. Why and how the Basic Expansion fails to be implemented
  • .VI.  Addendum #1: Primary relativities of the economic process
  • .VII. Addendum #2: Excerpts re the drift to totalitarianism

 

.I. Introductory

Modern Monetary Theory is a disaster waiting to happen. In its unchecked extreme of printing money unconstrained by relation to the real flow of goods, and services, it would bring about rampant inflation, menace the financial system, and, ultimately, bring about a) the destruction of the financial system, and b) social chaos.

Greg Mankiw has prepared a thought-provoking paper entitled A Skeptic’s Guide to Modern Monetary Theory (MMT).  Greg’s criticism is on strictly economic grounds, and his manner is unfailingly courteous, despite his being vexed by MMT.  However, for our part, we find it difficult to be civil when the proponents of MMT attempt to dignify and legitimize their incoherent set of tenets by using the word “theory.”  Further, rather than being an objective theory, MMT is contaminated by the psychology of its proponents, and MMT would enable a drift to totalitarianism.

Our orientation herein is, as always, towards a purely functional, purely relational, completely explanatory theory of the current, dynamic, economic process.  Our analysis is based on macrodynamic equilibrium as explained by the modern field theory of Functional Macroeconomic Dynamics.

Since we frequently simply refer to, rather than quote from, Greg’s article, our reader should have it at hand.  To access Greg’s article click here.

Elsewhere on this website we have treated MMT under the title “So-Called Modern Monetary Theory Does not Qualify as Scientific Macroeconomics.” (Click here.)

The sections of that treatment elsewhere have headings as follows.

  • 1. Introductory
  • 2. Four Diagrams of Interdependent flows:
  • 3. Key premises, principles, and laws of Functional Macroeconomic Dynamics
  • 4. MMT’s totalitarian premises, tenets and goals
  • 5. FMD agrees with MMT
  • 6. FMD disagrees with MMT
  • 7. Implementation of the basic expansion is necessary to achieve full employment
  • 8. The Nature of Money and the Expansion of Credit
  • 9. Nuances and misinterpretations of price changes
  • 10. Nuances of the double-edged manipulation of interest rates
  • 11. Further excerpts and comments indicating that macroeconomic theory is a science, not a set of wishful psychopolitical assertions
  • 12. How additional money should enter the expanding economic process
  • 13. Historical Research into What Goes Wrong;  Documentary or Fantasy?  Four countries
  • 14. A normative theoretical framework is required.
  • 15. The entire populace is responsible for The Concrete Good of Order
  • 16. Elsewhere on this website:
  • 17. Paul Krugman re MMT
  • 18. Lonergan, Marx, and Liberty
  • 19. Appendix: Alignment of the phases of the major expansion

 .II. The “laws” of the process; the “legal” basis of our criticism 

I would add that the aims and limitations of macroeconomics (that is, the circulation analysis presented here) make the use of a diagram particularly helpful, …  For its basic terms are defined by their functional relations.  (CWL 15, 54)

Diagram of Rates of Flow 2

Diagram of Rates of Flow

Depending on one’s momentary interest and point of view, this schematic may alternatively be called:

  • The Diagram of Two Operative Circuits Connected by Operative Crossovers
  • The Diagram of Functional Monetary Interdependencies
  • The Configuration of Monetary Conditions
  • The Diagram of Operative Functional Flows of Products, Payments, and Financings
  • The Diagram of Monetary Channels
  • The Diagram of Monetary Transfers
  • The Diagram of Monetary Circulations
  • The Diagram of the Monetary Correlates of the Productive Process
  • The Diagram of Interdependent, Implicitly-Defining, Mutually-Conditioning, Velocitous Functionings
  • The Double-Circuited, Credit-Centered Diagram which Sublates, Supervenes, and Replaces the Single-Circuit, Credit-Centered Diagram of Macroeconomics Textbooks
  • The Functional Framework
  • (Colloquially) The Way the Process Works
  • (Colloquially, because of its shape) Lonergan’s Baseball Diamond

The diagram prescinds from a) trade imbalances, b) government surpluses and deficits, and c) other collective surpluses and deficits, which can be imaged by superposed circuits lacking vital c’O’ and c”O” flows.

We list some of the key points of the Functional Macroeconomic Dynamics providing the basis for our criticism:

  • The entire economic process is unitary. And, so, the scientific explanation of the economic process is complete, coherent, and unitary.

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. (CWL 15, 179)

There is the tremendous simplification (a diagram) effects.  From millions of exchanges one advances to precise aggregates, relatively few in number, and so easy to follow up and handle. (CWL 15, 179)

… the aims and limitations of macroeconomics make the use of a diagram particularly helpful, … For its basic terms are defined by their functional relations.  (CWL 15, 54)

The maintaining (distinct process 1) of a standard of living 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… [CWL 15, 54]

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. … 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]

  • The basic terms of  Functional Macroeconomic Dynamics are defined by their functional relations.  In this unitary system, to know one significant variable is to know all significant variables. The essential elements and relations of the process can be represented in a single image; the process can be seen in its entirety in a single view, and it can be understood by a single sweeping insight into the internal, interdependencies made manifest by that single representative image.  Again, all basic terms are defined by their functional relations with one another; and all equations consist and cohere with one another.

Let us say, then, that for every basic insight there is a circle of terms and relations, such that the terms fix the relations, the relations fix the terms, and the insight fixes both.  If one grasps the necessary and sufficient conditions for the perfect roundness of this imagined plane curve, then one grasps not only the circle but also the point, the line, the circumference, the radii, the plane, and equality.  All the concepts tumble out together, because all are needed to express adequately a single insight.  All are coherent, for coherence basically means that all hang together from a single insight.  (CWL 3, 12/36)

Paraphrasing: … If one grasps in a single insight the necessary and sufficient conditions for the continuity, equilibrium, and normative functioning of the interdependent flows of goods and services, as represented by the double-circuited, credit -centered Diagram of Rates of Flow, then one grasps point-to-point relations, point-to-line relations, interdependent functional-flow velocities, basic incomes, ordinary surplus incomes, pure surplus incomes, the normativity of concomitance within and between circuits, the normative role of credit in the expansion of the process, etc.  All the explanatory concepts tumble out together, because all are needed to express adequately the single sweeping insight grasping the whole dynamic process in a single view.  The terms fix the relations, the relations fix the terms, and the insight fixes both.  All concepts and equations are coherent, for coherence basically means that all hang together from a single insight.  (CWL 3, 12/36)

Diagram of Rates of Flow 2

Diagram of Rates of Flow

  • A lack of understanding, or a total misunderstanding, results in misinterpretation and consequent mismanagement; human ignorance obviates the proper functioning of the economic process.

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… 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]

  • Real analysis is identifying money with what money buys.

Real analysis is identifying money with what money buys. … 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]

  • Description of a process does not constitute an explanatory theory of the process.

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.  The two are not totally independent, for they deal with the same things and, as we have seen, 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]

  • To analyze continuity, equilibrium, and constraints, one can go in either direction in the circuits of monetary functionings.

In studying the … circuits one may begin at any function to move in either direction.  One may begin anywhere because the total movement is circular, One may move in either direction, for one may ask where the money goes or where it is coming from.  Finally, one may regard the eight movements as simultaneous: they all occur within the same interval; the condition of circulation is satisfied if they occur within the interval; and the condition of circulation is the one condition required.[CWL 15, 165]

  • Money is an instrument invented by humans to serve the economic process – not to dominate the economic process. Money is a dummy, not a commodity to be hoarded. And real analysis is identifying money with what money buys.

… money is an instrument invented to fulfill a definite task; it is not the ultimate master of the situation.  One has to place first human society which is served by the economic process, and second the economic process which is to be served by money.  Accordingly money has to conform to the objective exigencies of the economic process, and not vice versa. (CWL 21, 101)

  • Money must have several properties; and – message to MMT ! – there are technical rules governing the issuance of money.

the real issue is the value of the dummy (enabling divided exchange rather than barter)..the relative value is its usefulness… the scarcity of the dummy is attended to by the technicians of the technical rules governing its issuance.  Whether it issues from the printing press or from the credit structure makes no difference. The economic value lies in the human effort against scarcity… the exchange value is the ratio or proportion in which are exchanged the different categories of objects for which men strive because they are useful and scarce…. (CWL 21, 37-39)

  • A critical property of money is the constancy of exchange value.

(We) 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….More briefly, if there is concomitance between the two flows, then the proportion in which dummies and goods exchange remains the same.  If there is lack of concomitance, then this proportion changes.  But exchange value is a proportion.  Therefore, the concomitance of the two flows is the condition of constant exchange value. (CWL 21, 37-39)

Money is the promise men live by.

Behind all the symbols, however, rests the central requirement of faith.  Money serves its indispensable purposes as long as we believe in it.  It ceases the moment we do not.  Money has well been called the promise men live by. (Philip McShane, Implementing Lonergan’s Economics (quoting R.L. Heilbroner, The Economic Problem(New Jersey, 1972)p. 532 in The Lonergan Review, Culture Science and Economics, Vol. III, No 1, Spring 2011, Seton Hall University p. 198)

  • Classes of functional monetary flows are derived by a projection or mapping from the structure of the productive process.  Note and ponder in the following paragraph the words “congruent” and “immediate.” Click here for Why Analyze the Rhythm of the Productive Process First.

… (Payments of money) stand in a network that is congruent with the technical network of the productive process. …above all, their connection with production is immediate: they …  are, so to speak, the immanent manifestation of the productive process as a process of value. [CWL 21, 114]

  • The continuity and dynamic equilibrium of the dynamic threefold process requires
    • conformity of production to the potential of the dynamic process
    • concomitance of product flows and dummy flows for constant exchange value
    • concomitance of supply and demand for money as the process expands
    • concomitant balance of intercircuit flows.

Lonergan’s distinction between basic and surplus production and circulation enables him to envisage clearly those further equilibria that have to be maintained” in the normative framework of a pure theory of economic expansion and growth…. An explanatory account of the intrinsically evolutionary processes of any industrial exchange economy’s cycles of surplus (i.e. producer-goods) and basic (i.e. consumer-goods) production and exchange has to reveal how the different phases in the distinct cycles intermesh and coordinate in an intelligible sequence, by means of differential rates of crossover payments from basic to surplus and from surplus to basic, depending on what phase of aggregate expansion or leveling off the economy happens to be in at any given time. (CWL 15, Editor’s Introduction lxiii)

  • Expansion takes place in a series of phases.

 

 

 

 

  • Analysis requires a scientific, explanatory heuristic specifying the method of analysis and the type of answer being sought. The more profound point of view and the deeper insight of explanatory Functional Macroeconomic Dynamics is an explanation in terms of interdependent functional flows of outlays, incomes, and expenditures, varying continuously between point-to-point and point-to-line activities according to the phases of the expansion, rather than in terms of microeconomic theory of households and firms contesting without perspective for their maximum slice of the pie.
  • A key condition of dynamic equilibrium is the balance of the intercircuit dealings.The criteria of this crossover balance are really the criteria of a) when and how much to consume or invest, b) shifting income distribution to ensure the timing and quantity of consumption and investment, and c) the necessity of implementation of the basic-expansion phase of an expansion. Shifts in income distribution are systematically necessary, not as a matter of a simplistic moral imperative, but rather as a matter of an intelligent adaptation to systematic requirements.

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]

  • New money should enter the system to finance real production through the supply channels (S’-s’O’) and (S”-s”O”) rather than along (D’-s’I’) and (D”-s”I”). The purpose of money is to bridge the gap between outlays and incomes associated with real production and expenditures-receipts associated with real exchange.  Entries along (D’-s’I’) and (D”-s”I”) belong to the theory of booms and slumps.

With at zero, positive or negative transfers to basic demand (D’ – s’I’) and consequent similar transfers to surplus demand (D” – s”I”) belong to the theory of booms and slumps.  They involve changes in (aggregate basic or aggregate surplus) demand, with entrepreneurs receiving back more (or less) than they paid out in outlay (which includes profits of all kinds).  The immediate effect is on price levels at the final markets, and to these changes (in price), enterprise as a whole responds to release an upward (or downward) movement of the whole economy.  [CWL 15, 64]

  • A new theory of the quantity and velocity of money:

the work for money to do is to move, say, wheat from the western plains to the householder’s table, and increasing the number of owners that intervene in the process gives no more than a phenomenal increase in the velocity of money. … the velocity of money in the main circuits is tied to the velocity with which goods are produced and sold. …the velocity of money in the main circuits coincides with the velocity, the time interval, between the initiation of production and the moment of final sale. [CWL 21, 61-62]

A change in the rapidity with which money changes hands is in itself impotent to effect a circuit acceleration; what is needed is a change in the circuit velocity of money, in the rapidity with which money performs a circuit of work moving, say, from expenditure through receipts, outlay, income back to expenditure.  This difference is important.  For, while the rapidity with which money changes hands is a highly indeterminate concept, the rapidity with which it performs a circuit of work may be correlated exactly with the turnover frequency of commerce and industry.  [CWL 15, 56]

We have to deal not with the quantity and velocity of money in all and any payments but only with the quantity and velocity in operative payments.  But operative payments have been defined as standing in a network congruent with the network of the productive process; it follows that we have to deal with quantities of money congruent with the values emerging in the productive process, and with the velocities of money congruent with the velocities of the productive process. In fact, we shall be able to deal with the more precise ideas of turnover size and turnover frequency instead of ill-defined ideas of quantity and velocity of money. [CWL 21, 135]

.III. Key objections to Modern Monetary Theory

Among our many significant contentions are the following:

  • The proponents of MMT do not know what constitutes good theory.

In brief Lonergan is looking for an explanation in which the terms are defined by the relations in which they stand, that is, by a process of implicit definition. … No doubt Keynes was an economist first and a methodologist second … Lonergan, for his part, is perhaps a methodologist first and an economist second, but he was able to push his economic reflections further than Keynes because he had a firmer grasp of the essentials of an effective theory.  … Lonergan’s critique (shows that) … the emphasis shifts … to searching heuristically for the maximum extent of (functional) interconnections and interdependence; and that the variables (of the mechanism) discovered in this way might not resemble very much the objects (or the aggregates) (such as coincidental prices, or accounting profit-and-loss categories) which, in the first instance, (the non-methodologist) was thinking about.   [Gibbons 1987]

 

  • The following two quotes from [MW&W, 2019] exhibit gross ignorance of what constitutes a properly functioning financial system. The bond markets would and will not stand for MMT’s monetary folly.  Recall that “the concomitance of the two flows is the condition of constant exchange value.” (CWL 21, 37-39)

The most important conclusion reached by MMT is that the issuer of a currency faces no financial constraints.  Put simply, a country that issues its own currency can never run out and can never become insolvent in its own currency.  It can make all the payments that come due. ([MW&W, 2019, 13], as quoted in Mankiw 2019, page 1]

As a result, for most governments, there is no default risk on government debt. ([MW&W, 2019, 15] as quoted in Mankiw 2019, page 1]

  • MMT is primarily a set of psychopolitical dispositions masquerading as objective macroeconomic monetary theory.
  • Whether based on deliberate malice, egregious ignorance, or gross incompetence, rampant inflation and deflation are “illegal” swindles.

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]

Behind all the symbols rests the central requirement of faith.  Money serves its indispensable purposes as long as we believe in it.  It ceases the moment we do not.  Money has well been called the promise men live by.  (Philip McShane, Implementing Lonergan’s Economics (quoting R.L. Heilbroner, The Economic Problem(New Jersey, 1972)p. 532 in The Lonergan Review, Culture Science and Economics, Vol. III, No 1, Spring 2011, Seton Hall University p. 198)

  • Modern Monetary Theory is a disaster waiting to happen. In its unchecked extreme of printing money unconstrained by relation to the real flow of goods, and services, it would bring about rampant inflation, menace the financial system, and, ultimately, bring about the destruction of the financial system and social chaos.

Banks are willing to increase the quantity of money as long as there is no appearance of uncontrolled inflation, but they curtail and even contract loans as soon as an upward spiral of prices menaces the monetary system.  Thus the root of the failure of the mechanism is the failure to obtain the anti-egalitarian shift in the distribution of income.  [CWL 15, 138]

  • Full employment and the realization of full economic potential, which we all seek, requires understanding and implementation of the series of phases constituting the evolutionary expansions of the economic process.

An explanatory account of the intrinsically evolutionary processes of any industrial exchange economy’s cycles of surplus (i.e. producer-goods) and basic (i.e. consumer-goods) production and exchange has to reveal how the different phases in the distinct cycles intermesh and coordinate in an intelligible sequence, by means of differential rates of crossover payments from basic to surplus and from surplus to basic, depending on what phase of aggregate expansion or leveling of the economy happens to be in at any given time. CWL 15, lxiii

  • The Fed does not have the tools or the understanding to effect full employment by purely monetary actions.
  • The U.S. Treasury must not be allowed to print money willy-nilly to satisfy the psychopolitical desires of a left-leaning or a right-leaning totalitarian chief executive, and by so doing destroy the financial system and create social chaos.
  • Modern Monetary Theory is a recipe for the destruction of the trust between people and institutions on which a properly functioning financial system must be based. Have the proponents of MMT ever searched for the explanation of the inflation in post World War I Germany which destroyed the economy and allowed the dictator Hitler to waltz into power? Or the explanation of the more recent inflation in Zimbabwe, when the government printed money without restraint to pay its bills?
  • We repeat: The proponents of MMT do not know what constitutes good theory. And we add:

There is such a thing as progress and its principle is liberty. … However, while there is progress and while its principle is liberty, there also is decline and its principle is bias. There is the minor principle of group bias which tends to generate its own corrective. There is the major principle of general bias and, though it too generates its own corrective, it does so only by confronting human intelligence with the alternative of adopting a higher viewpoint or perishing. To ignore the fact of decline was the error of the old liberal views of automatic progress. The far more confusing error of Marx was to lump together both progress and the two principles of decline under the impressive name of dialectical materialism, to grasp that the minor principle of decline would correct itself more rapidly through class war, and then to leap gaily to the sweeping conclusion that class war would accelerate progress. What, in fact, was accelerated was major decline which in Russia and Germany leaped to fairly thorough brands of totalitarianism. The basic service of the higher viewpoint will be a liberation from confusion through clear distinctions. Progress is not to be confused with decline; the corrective mechanism of the minor principle of decline is not to be thought capable of meeting the issues set by the major principle. [CWL 3, 234-235/259-60]

A rigidly egalitarian system belongs to a perfectly egalitarian world; (but) a world in which men are, in fact, unequal must find a different system.  What system? If the idealism is sentiment without intelligence, it is as likely as not to mate with the underground cynicism of the revolutionaries to foist upon us a dictatorship of the proletariat in which the proletariat does not dictate, a dictatorship of the Herrenvolk in which the Volk obeys the Fuhrer. But if that idealism can be brought too learn the discipline of logic and of scientific reflection, then it will impose a generalization of the exchange economy.  To determine the nature of such a generalization is the aim of this inquiry; but at once this is at least evident.  The vast forces of human benevolence can no longer be left to tumble down the Niagara of fine sentiments and noble dreams.  They have to be assigned a function and harnessed within the exchange system, for in no other way can that system shake off its fictitious fetters to move consistently towards its maximum. [CWL 21, 36]

Lonergan did not think Marx achieved an explanatory grasp of the intelligibility of the economic sphere as such.  Marx’s labor theory of value invoked an admixture of political, sociological, and especially proprietorial dimensions.  Moreover, Lonergan had no respect for the way an illegitimate importation of sociological categories into the properly economic sphere lends support to the simpliste Marxist-socialist penchant for setting entrepreneurs and workers against each other.  Marxist advocacy of group bias and the use of propaganda and violence short-circuit democratic solidarity.  To Lonergan’s way of thinking, a moral vision that substitutes propaganda and force for its lack of intellectual acuity is a self-contradiction much more radical than the ‘contradictions’ that supposedly drive dialectical materialism.  [CWL 15 Editors’ Introduction, xlvi-xlvii]

(Marx’s) notion of surplus value has sociological and proprietorial dimensions – that is, the difference between the full value bestowed on a commodity by the laborers and what is returned to laborers in the form of wages – rather than the sheerly functional dimensions that constitute its intrinsic meaning for Lonergan. [CWL 15 Editors’ Introduction, lxi ftnt 104]

.IV. Observations re “A Skeptic’s Guide to Modern Monetary Theory”:

 Page 2:  “MMT begins … three reasons.”  The issue is:  The freedom that MMT asserts for itself is the freedom to violate the principles and laws of a scientific and just macroeconomics and the promises and trust between people and institutions upon which the process relies.  In the sense that it violates “laws”, it is “illegal.”  In the sense that it is willing to break promises and to violate trust, it is immoral.

Mitchell, Wray, and Watt write:

The most important conclusion reached by MMT is that the issuer of a currency faces no financial constraints.  Put simply, a country that issues its own currency can never run out and can never become insolvent in its own currency.  It can make all the payments that come due. ([MW&W, 2019, 13], as quoted in Mankiw 2019, page 1]

As a result, for most governments, there is no default risk on government debt. ([MW&W, 2019, 15] as quoted in Mankiw 2019, page 1]

It is true that a government can always print its own currency to pay its bills denominated in its own currency, but this violates the laws of the normative constancy of exchange value.  FMD’s sound theory of a properly functioning economy requires a) all participants, including government, to pay back at a reasonably constant exchange value the money they borrow, b) money to enter the system through (S’-s’O’) and (S”-s”O”) so as to be justified as outlays to productive contributors for the productive contributions they make.

In an initially equilibrated economic process, new and additional money entering through (D’-s’I’) and (D”-s”I”) belongs to the theory of the distortive divergences called booms and slumps. In one case, new and additional money entering through (D’-s’I’) and (D”-s”I”) is intrinsically inflationary, thus a reduction of purchasing power constituting swindle rather than fair exchange.

Inflation, deliberately and willingly caused, constitutes a degree of default.  The proponents of MMT may assert that the bills are paid in the correct number of units of currency, but the degree of inflation contained constitutes the degree of default and, to that extent, a swindle, a broken promise and a breach of trust.

Diagram of Rates of Flow 2

Diagram of Rates of Flow

With at zero, positive or negative transfers to basic demand (D’ – s’I’) and consequent similar transfers to surplus demand (D” – s”I”) belong to the theory of booms and slumps.  They involve changes in (aggregate basic or aggregate surplus) demand, with entrepreneurs receiving back more (or less) than they paid out in outlay (which includes profits of all kinds).  The immediate effect is on price levels at the final markets, and to these changes (in price), enterprise as a whole responds to release an upward (or downward) movement of the whole economy.  [CWL 15, 64]

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]

Pages 2-3: “First, in our current … demand and inflation.”  The issues are: Who winds up with the new and additional printed money? And how will the new printed money circulate in any of the phases of an expanding and tapering process?  Will the money be justified properly by production and continued circulation? And will there be proper shifts in the distribution of incomes as an expansion progresses through its phases.

MMT sticks its head in the sand when questions such as those are asked.

New additional money printed by the government and channeled through (D’-s’I’) and (D”-s”I”) to pay its obligations will likely go into a) reserves at the Fed or the banks, or b) directly and immediately into the secondary stock and bond markets, or c) indirectly or eventually into the secondary stock and bond markets.  If it remains idle in the secondary markets, it inflates those markets such that there may be a bifurcation of purchasing power between the secondary markets and the primary market for real goods and services.  This is a pathology of markets.  And in either case, interest rates in general will fall such that interest payments may be negligible or negative.

To be sure, not every bit of new income winds up idle.  There will be some increase in demand from those who come into control of the new money due to the wealth effect, notably in luxury items, but to a lesser effect on bread and butter items.

But MMT misses the whole idea of new money being non-inflationary or less inflationary because it is justified by associated production. MMT has no idea that money is an instrument invented by humans to serve the economic process of production for sale. The classes of payments and their normative circulation are derived from a projection of the structure of the productive process onto payments in general  Real analysis is analyzing what money buys; and, so, the structure of the productive process – the process of making-what-money-buys – must be analyzed first; only then can the laws of the circulation-of-dummy-money process be intuited so that these laws can be obeyed.  Again, for the umpteenth time,

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]

Also, click here to read Why Analyze the Productive Process First.

The economic process must be managed according to the normative theory that explains how elements of the process are interrelated, how the process functions properly, and how growth is constrained by finitudes in a finite world.  Flows must be equilibrated by the balance of the crossovers and the balance of budgets. And the basic phase of the expansion process, requiring that the poor get richer, must be implemented  Click here for Why and How the Basic Expansion Fails to be Implemented.

In a long-term expansion in phases, income shifts are required.

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]

In a static phase, there is no aggregate increase in wealth.

In the static phase, then, things tend to remain as they were.  The economic process lies fallow: there is no increase in the means of production, or DA” would not be constant at the effective zero; there is no increase in the ordinary DA’ of standard of living or in the overhead DA’ of cultural expansion. Though individuals may become richer by making other individuals poorer, there is no possibility of an aggregate increase of wealth, where wealth is understood dynamically. (CWL 21, 23)

The first difficulty is psychological.  The static phase is a sombre world for men brought up on the strong drink of expansion. They have to be cured of their appetite for making more and more money that they may have more money to invest and so make more money and have more money to invest.  They have to be fitted out with a mentality that will aim at and with a going concern and a standard of living.  It is not so easy to effect this change, for as the Wise Man saith, the number of fools is infinite. [CWL 21, 97-98]

Page 3: “Faced with … to hyperinflation.”  The issue is: Is it OK to default on debt?

A well managed and properly functioning economy has no need of incurring a large debt and then defaulting.  Default should never occur if the private productive sector, the government productive sector, and the private and government financial sectors, understand and abide by the simple matters of promise and trust – that the borrower makes the lender whole as to the purchasing power of his/her money. Further, while default in good faith must be considered legal according to the bankruptcy laws of the nation, default in bad faith must be considered “criminal” according to the “laws” of the economic process.  Further, the bond markets won’t act kindly towards a government which inflates the currency used by all and cannot be trusted to pay its debts at constant exchange values.  The markets will, at some point, demand increasing inflation and risk components in the market interest rates – for all borrowers – not only on government bonds but also on all corporate and other bonds of any significant maturity.  The calculations of inflation protection will be nightmarish.  The financial system will be menaced.

Page 3:  “This discussion … strong correlation.” The issues are 1) the quantity theory of money, and 2) the explanation of inflation.  Again, Real analysis is identifying money with what money buys as it constitutes rhythmic outlays for the production of goods and services and rhythmic expenditures for the purchase of goods and services.

operative payments have been defined as standing in a network congruent with the network of the productive process; it follows that we have to deal with quantities of money congruent with the values emerging in the productive process (turnover dollar magnitudes), and with the velocities (turnover frequencies) of money congruent with the velocities of the productive process. [CWL 21, 135]

the work for money to do is to move, say, wheat from the western plains to the householder’s table, and increasing the number of owners that intervene in the process gives no more than a phenomenal increase in the velocity of money. … the velocity of money in the main circuits is tied to the velocity with which goods are produced and sold. …the velocity of money in the main circuits coincides with the velocity, the time interval, between the initiation of production and the moment of final sale. [CWL 21, 61-62]

We are interested in how the money functions, and that has already been given sufficient meaning by our reflections on classes of payments.  The money will function in meeting the flow of basic production or in meeting the flow of surplus production.  [McShane, 1995, 58]

But, we do admit, easy for us and others to sit here and encourage the Fed to use operations in the money market for injecting only the right amount of money needed for transactions.  How much is the right amount? How fast will new money perform circuits of work?  In the vast and intricate production-and-sale network, how expeditiously will the money-using firms coordinate with the other firms with whom they deal in the rectilinear series from the initiation of work on a particular product to the completion of that product by final sale? What will be the turnover quantities and turnover frequencies of all units of enterprise along the way; and what will be the monetary magnitudes and frequencies of the turnovers; i.e. with what velocity will money do its work?

Despite the probabilities and uncertainties, it remains true that variations in the volume of exchange activity, if not to result in inflation or deflation, postulate some variations in the quantity.

While there is no simple and even perhaps no ascertainable correlation between the quantity of money and the volume of exchange activity, it remains true that variations in the volume, if not to result in inflation or deflation, postulate some variations in the quantity.  Now in the long run these variations in quantity can be had only by the introduction of a money of account, … [CWL 21, 104]

In the surplus expansion, basic capacity has not yet been expanded, but initially the fraction R is increasing, dR and its coefficient a’’ are both positive, da’’ is initially positive to expand the basic price spread and induce speculators in the production series to stock up on materials, semi-finished goods, and finished goods.  The flow of surplus outlays crossing over into the basic circuit combines with the flow of money in the basic circuit to outstrip the flow of goods available in the basic circuit.  The flow of money is disproportionate to the flow of goods.[CWL 15, 160-61]

Unless all the units (of enterprise) in the series simultaneously increase frequency from reduced turnover periods, there cannot be a general acceleration due exclusively to increased frequency; the units with increased frequency have to reduce their turnover magnitudes to allow other units in the series without increased frequency to accelerate by increased turnover magnitudes.  [CWL 15, 59]

The introduction of more, or more efficient units of production is not to be expected to take place in random fashion: the supply of a single product depends upon the activities of many units …; on the other hand, increased demand does not concentrate upon some one product but divides over several products, so that if there is increased demand for one, there will be an increased demand for many; and as the increased demand for one justifies development in a series of productive units, so the increased demand for many justifies development in a series of series of units. [CWL 15, 35-6]

Again,

A change in the rapidity with which money changes hands is in itself impotent to effect a circuit acceleration; what is needed is a change in the circuit velocity of money, in the rapidity with which money performs a circuit of work moving, say, from expenditure through receipts, outlay, income back to expenditure.  This difference is important.  For, while the rapidity with which money changes hands is a highly indeterminate concept, the rapidity with which it performs a circuit of work may be correlated exactly with the turnover frequency of commerce and industry.  [CWL 15, 56]

Functional Macroeconomic Dynamics develops a new magnitude-and-frequency theory of money to replace the indeterminate textbook velocity-of-money equation P x Y = M x V.  We advance from the highly indeterminate concept of the rapidity with which money changes hands to the highly determinate concept of the rapidity with which it performs a circuit of work.  We advance to the more precise ideas of turnover size and turnover frequency instead of ill-defined ideas of quantity and velocity of money.

We have to deal not with the quantity and velocity of money in all and any payments but only with the quantity and velocity in operative payments.  But operative payments have been defined as standing in a network congruent with the network of the productive process; it follows that we have to deal with quantities of money congruent with the values emerging in the productive process, and with the velocities of money congruent with the velocities of the productive process. In fact, we shall be able to deal with the more precise ideas of turnover size and turnover frequency instead of ill-defined ideas of quantity and velocity of money. [CWL 21, 135]

Inflation is explained by comparing two flows:

(We) 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….More briefly, if there is concomitance between the two flows, then the proportion in which dummies and goods exchange remains the same.  If there is lack of concomitance, then this proportion changes.  But exchange value is a proportion. Therefore, the concomitance of the two flows is the condition of constant exchange value. [CWL 21, 37-39]

The main analytic apparatus is now complete.  The two acceleration systems have been defined: a circulatory system consisting of two connected circuits that are accelerated by an external redistribution function; a quantity system of two parts in which one part is the long-term accelerator of the other.  In each of these acceleration systems … an inner logic or ground in the nature of things indicates the normative or pure cycle of the quantity process.  Finally, indices of price increments serve as markers of the divergence between the two systems. [CWL 21, 134]

Pages 3-4: “Nonetheless … refute it.” The issue is:  What is the explanation, i.e. the formal cause of inflation?

As we often repeat:

(We) 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….More briefly, if there is concomitance between the two flows, then the proportion in which dummies and goods exchange remains the same.  If there is lack of concomitance, then this proportion changes.  But exchange value is a proportion. Therefore, the concomitance of the two flows is the condition of constant exchange value. [CWL 21, 37-39]

The macroeconomist must first analyze the productive process and its phases in a pure cycle of expansion. Then, by projecting the structure of the dynamic process into payments, analyze the flows of products and the circulation of money.

Page 4:  “MMT proponents … class struggle.”  The issue is that the science of economics must be strictly objective; it must not be contaminated by sociological, anthropological, or psychological categories. It must not be put in the observer’s Procrustean bed of his/her psychopolitical inclinations and impetuosities.

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]

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 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]

Indeed, economics seems little different from other areas of knowledge in its tendency to form closed schools of thought (I.e. Keynesian, Monetarist, Marxist, etc.)  This fragmentation into schools places political and other social values at the source of theoretical differences[Gibbons, 1987]

Lonergan did not think Marx achieved an explanatory grasp of the intelligibility of the economic sphere as such.  Marx’s labor theory of value invoked an admixture of political, sociological, and especially proprietorial dimensions.  Moreover, Lonergan had no respect for the way an illegitimate importation of sociological categories into the properly economic sphere lends support to the simpliste Marxist-socialist penchant for setting entrepreneurs and workers against each other.  Marxist advocacy of group bias and the use of propaganda and violence short-circuit democratic solidarity.  To Lonergan’s way of thinking, a moral vision that substitutes propaganda and force for its lack of intellectual acuity is a self-contradiction much more radical than the ‘contradictions’ that supposedly drive dialectical materialism.  [CWL 15 Editors’ Introduction, xlvi-xlvii]

Functional Macroeconomic Dynamics is purely functional, purely relational, economic science. It is not sociology mandating class warfare.  FMD, thus, constitutes a sort of Copernican revolution.

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]

Page 4:  “Mainstream … absorb it.”  The issue is, again: What is the explanation, i.e. the formal cause of inflation?  Inflation is explained by disproportionate flows:

More briefly, if there is concomitance between the two flows, then the proportion in which dummies and goods exchange remains the same.  If there is lack of concomitance, then this proportion changes.  But exchange value is a proportion. Therefore, the concomitance of the two flows is the condition of constant exchange value. [CWL 21, 37-39]

Diagram of Rates of Flow 2

Diagram of Rates of Flow

Inflation, as in 2005-2009, can occur in several configurations of flows, the most blameworthy of which is excess credit into, say, government operations or the housing market.

There can be several movements of money outstripping the flows of products:

  • In the early stage of expansion, when more money is moving along c”O” )in the Diagram of Rates of Flow) to increase basic income, while, for a temporary lack of capacity, there is not a proportionate increase in the flow of basic products.
  • The basic, consumables, point-to-point circuit is, by an imbalance of the crossovers, draining the surplus, accelerator, point-to-line circuit.
  • The government is taxing point-to-line income too much and point-to-point income too little, so that the basic circuit of consumables is inflating while the point-to-line circuit is being drained.
  • When, in a fair exchange or act of goodwill, lower-propensity-to-consume Smith pays money to greater-propensity-to-consume Jones
  • Expectations of inflation, which may vary in severity from mild to painful and in timing from who-knows-when to who-knows-when, prompt buy-now-sell-later attitudes. Thus, this expectation of future inflation may be tantamount to a self-fulfillment in the here and now.
  • Speculation by earlier contributors in the production series results in excess buying

Reference to Gjerstad

Page 4:  “The advocates … aggregate demand.”  The issue is capacity and capacity usage.

These paragraphs deal with

  • a) excess investment and capacity
  • b.) in the case of excess capacity, some units of enterprise are less vulnerable to corrective downturns than others:
  • c) the process of the self-healing of the economic process.

a) excess investment and capacity

Lonergan is careful to distinguish between a “short-term expansion” which involves taking up slack in existing capacity, and “long-term expansion” which elevates the process to a higher level of output and, thus, puts the process on a new basis.  The general form of long-term acceleration is given by the lagged technical  accelerator, which accounts in general for short-term acceleration, repair and maintenance, increase in surplus expansionary production, acceleration on a lower level, time, and magnitude of acceleration.

kn[f’n(t-a)-Bn] = f”n-1(t) – An-1   [CWL 15, 37]

Taking up slack is the achieving of a fuller use of existing capital equipment and other resources.  This activity of making fuller use of existing capital and people is called a  short-term acceleration.  It is distinguished from a long-term acceleration constituted by a higher level of goods and services within the constraints of cultural, political, and technical development.  Any long-term acceleration has to begin as a short-term acceleration.

A distinction has to be drawn between short-term and long-term accelerations of the productive process.  A short-term acceleration is an increase in rates of production due to a fuller use of existing capital equipment, to a greater efficiency of labor and management, to a decrease in stocks of goods.  A long-term acceleration is an increase in rates of production due to the introduction of more capital equipment and/or more efficient capital equipment.  The latter is termed a long-term acceleration because it changes the basis on which the short-term acceleration works.  CWL 15, 32

For with better men, a better organization of men, and better practical ideas, it becomes possible through short-term accelerations to introduce more efficient equipment, displace labor, devote the displaced labor to a greater quantity of equipment, and so recommence the wave or cycle of long-term advance. (CWL 15, 34-35)

Now any long-term acceleration has to begin as a short-term acceleration.  New capital equipment does not begin to accelerate rates of production until it has been produced; its production in a series of initial cases has to be a matter of the more intense or more efficient use of existing facilities, in brief, a short-term acceleration. (CWL 15, 126)

A surplus expansion tapers off at its limit.

In the limit the whole effort of the surplus stage is devoted to replacement and maintenance of capital equipment, and then the only possibility of further acceleration is to depart from the assumption of a given level of cultural, political, and technical development.  CWL 15, 34-35

b.) In the case of excess capacity, some units of enterprise are less vulnerable to corrective downturns than others:

Excess capacity may exist because of over investment; and this systematically requires a corrective reduction of surplus activity.  Lonergan explains the corrective reduction. Some units of enterprise are less vulnerable to corrective downturns than others.

Such relative invulnerability brings the circuits to a distorted quasi-equilibrium in which an artificial rate of pure surplus income is sustained by a rate of losses. … there is no compensating rate of new fixed investment to offset this drain [of artificial pure surplus income].  There results a negative value of (D”-s”I”) [as the less vulnerable direct money into Redistributive Function] but the squeeze gives positive values of (S” – s”O”) and particularly (S’- s’O’) as embarrassed entrepreneurs undergo [and must borrow to support] a continuous and equal stream of losses. … however the matter is expressed, the rate of losses has to equal the emergence of more surplus income than the process in the given interval is generating; and if at any time the rate of losses proves insufficient, the familiar mechanism of falling prices, decreased total income, and increased purchasing power comes into play either to decrease the rate of savings [of the less vulnerable] or to increase the rate of losses [of the more vulnerable]. … Any number of [the more vulnerable] firms may go bankrupt and be liquidated.  But until the position of the strong is undermined by the general and prolonged contracting, the requirement for the rate of losses continues, and with it the depression. [CWL 15, 154-55]

c) the process of the self-healing of the economic system.

There have been in history many economic crises.  But they weren’t the end of everything.  Long before any interventions by the Fed, the sick economic process healed itself. (Google economic crises)

until the position of the strongis undermined by the general and prolonged contracting, the requirementfor the rate of losses continues, and with it the depression. … On the other hand, increasing contraction and liquidation tends to reduce the requirement for a rate of losses: with the surplus stage3already operating at a minimum3b, any further reduction of the basic stage means that a zero dQ”/Q” is greater than a negative dQ’/Q’; this postulatesan increasing rate of savings, and under the circumstances, this increase of required savings (since actual savings already are too great) is a reduction of losses.5  Thus the greater the contraction, the less the rate of losses required; again, the greater the contraction, the weaker the position of the initially invulnerable6; in the limit the rate of losses will disappear, and a distorted equilibriumgive place to a true equilibrium.8 Meanwhile, obsolescence will have mounted, and so as orders for replacements begin to increase they will be accompanied by surplus purchases that are new fixed investment; v9begins to increase, and the proportionate expansion of the revival is underway. [CWL 15, 155-56]

We refer the reader to

 

We also recommend scrutiny of the Fed’s G.17 tables.

 1.            G.17 Release Tables:

Last Update: December 17, 2019

 Page 5:   “At the risk … insufficient demand.”  The issue is the transition from the surplus-expansion phase to the basic-expansion phase in a long-term expansion.

The new-Keynesian research mentioned starts with wages and prices as given.  Wages and prices are determinate measurements; in that sense that they are given.  But, though they and their indexes may be given, still, they do not explain.  Wages and prices are secondary determinations in a non-systematic manifold.  Their determination is probabilistic.  They do not explain; rather they need to be explained in the light of the relations among significant variables.

Lonergan agreed with Schumpeter on the importance of systematic or analytic framework  in order to explain, rather than merely record or describe, the aggregate phenomena of macroeconomics; he agreed with Schumpeter that to be able to explain the booms, slumps, and crashes of the trade or business cycles the economist’s analysis had to be as dynamic as the subject matter under investigation; and he agreed that the economist had to know what are the significant variables in the light of which price changes are to be interpreted.  According to Lonergan, standard economic theory had successfully achieved none of these desiderata. [CWL 15, Editors’ Introduction liii]

Lonergan is alone in using this difference in economic activities to specify the significant variables in his dynamic analysis… no one else considers the functional distinctions between different kinds of (rhythmic production flows) prior to, and more fundamental than, … price levels and patterns, … interest and profits, and so forth….only Lonergan analyzes booms and slumps in terms of how their (explanatory) velocities, accelerations, and decelerations are or are not equilibrated in relation to the events, movements, and changes in two distinct monetary circuits of production and exchange as considered both in themselves (with circulatory, sequential dependence) and in relation to each other by means of crossover payments. [CWL 15, Editors’ Introduction, lxii]

One might be reminded here of a parallel in hydrodynamics: if what is at issue is a general specification of the dynamics of free water waves, a premature introduction of general boundary conditions or worse, specific channel conditions, botches the analytic possibilities….the Robinson-Eatwell analysis is hampered by their building the economic priora quoad nos of profits, wages, prices, etc., into explanation, when in fact the priora quoad nos are last in analysis: they require explanation. [McShane 1980, 124]

Lonergan’s intention was ‘to formulate the laws of an economic mechanism more remote and, in a sense, more fundamental than the pricing system…laws which men themselves administrate in the personal conduct of their lives. In 1978 he began to refer to Nicholas Kaldor in support of his judgment that the significance traditionally accorded to price theory by conventional economics since Adam Smith’s Wealth of Nations (1776) amounted to a virtual derailment of economic theory. [CWL 15, Editors’ Introduction xlv]

Wages and prices could possibly and probably be different in any instance.  And a particular flow of payments could be composed of many different combinations of price vector times quantity vector.  The fundamental analyzand is not prices – despite the insistence of new Keynesians – but rather the structure of the productive process, which exhibits primary relativities in the light of which the variables correlated with the productive process, such as price and quantity can be explained.  And possible differences of price in units of currency, say for the same chocolate bar, between the Swiss Franc and the U.S. dollar, can be handled by transformation equations preserving the primary relativities of the economic process.

Rather than in terms of different possible “regimes” the analysis should seek a unitary explanation of universal relevance with a single set of primary relativities, expressing the relation of significant variables to one another.

Since the overall functioning is a system of interdependent, mutually defining, velocitous functions, rather than an accountant’s statement of a firm’s net income, the analysis must be purely functional and purely relational.  By its scientific and dynamic heuristic, the analysis seeks to discover a unitary system of dynamic interdependent  functionings. There should be an adjustment of basic and surplus incomes according to the normative requirements of the process for full potential as yielded by a single normative theory.  A critical activity in a properly functioning economy is implementating the basic expansion by paying higher wages to the lower-compensated participants!!!

Page 5:  “Now fast forward … Romer, 1990.”  The issue is stated as wage and price adjustment.

The treatment fails to recognize slack and, instead, focuses on the microeconomics of firms and workers-households; but the real focus must be on the macroeconomic dynamic equilibrium of functional flows defined by their functional relations to one another, to which all participants must adapt.

Pages 6-7:  “This logic … not practical.”  The issue is unused capacity; i.e. the “slack” in the system.

MMT’s proponents do not know what constitutes good theory; they have little sincere regard for proper theory.  Rather, they focus nonchalantly on printing any amount of money required for all the goods and services it wishes to dole out.  It is willing to completely disconnect reward from effort or contribution.

MMT is unable to scientifically characterize either excess supply or inadequate supply within FMD’s framework and normative theory.  Continuity, equilibrium, laws of the process, and the constraints of finitude are not in its proponents’ ken.

On the other hand and in stark contrast, FMD provides an objective theory that mandates that the implementation of the surplus phase of the long-term expansion be succeeded by the implementation of the basic phase, in which assets are fully utilized and full employment is achieved; that is, in which there is no slack, no excess capacity, no excess pricing power, no inadequate demand for labor. FMD is unitary and universally relevant.  Its primary relativities are relevant in any and every instance.  It has no need for descriptive terms such as “Keynesian regimes”.  Rather its primary abstract terms are point-to-point, point-to-line, (t-a), f’, f”and k.

kn[f’n(t-a)-Bn] = f”n-1(t) – An-1  (CWL 15, 37),

and the terms of the Diagram of Rates of Flow.

Diagram of Rates of Flow 2

Diagram of Rates of Flow

.V. Why and how the basic expansion fails to be implemented

Click here.

.VI. Addendum #1: Primary relativities of the economic process

Lonergan discovered a set of abstract general explanatory relationships among significant interdependent variables applicable currently and continuously and, thus, in every instance of the evolution of the economic process. And by the application of these abstract primary relativities to the secondary boundary conditions of time lags, prices, quantities, labor supply, money supply and technical coefficients, one can reach the particular formulation of the concrete, overall, economic functioning.

We have two lists of primary relativities: the first based upon the dynamic equilibrium of the process, and the second giving the normative theory of the expansion of the process.

The first set of primary relativities is listed  below, with reference to pages of CWL 15 in parentheses. The first equation in this first set is the lagged technical accelerator of the productive process with which normative monetary circulations are correlated. The rest are the relations among the circulations of money.  One of the monetary relations in this set provides the condition of equilibrium universally applicable throughout the temporal process.  And note that, though the relations are symbolized in algebraic functions,  the symbols represent interdependent rates of velocitous flows, i.e. so much or so many every so often, d/dt and Δ/Δt, as diagrammed in the double-circuited, credit centered, Rates of Flow.

  • kn[f’n(t-a)-Bn] = f”n-1(t) – An-1    (CWL 15, 37)
  • R’ = E’     (CWL 15, 54)
  • R” = E”      (CWL 15, 54)
  • I’ = O’ +M’      (CWL 15, 54)
  • I” = O” +M”     (CWL 15, 54)
  • G = c”O” –i’O’   (CWL 15, 54)
  • G = c”O” –i’O’ = 0     the condition of dynamic equilibrium   (CWL 16, 50)
  • M’ = (S’ – s’O’) + (D’ – s’I’) + G   (CWL 15, 54)
  • M” = (S” – s”O”) + (D” – s”I”) – G   (CWL 15, 54)
  • (S’-s’O’) = ΔT’ + (O’ – R’) + ΔR’  (CWL 16, 67)
  • (S”- s”O”) = ΔT” + (O” – R”) + ΔR”  (CWL 16, 67) 
Diagram of Rates of Flow 2

Diagram of Rates of Flow

Those familiar with elementary statics and dynamics will appreciate the shift in thinking involved in passing from (static) equilibrium analysis … to an analysis where attention is focused on second-order differential equations, on d2θ/dt2, d2x/dt2, d2y/dt2, on the primary relativities of a range of related forces, central, friction, whatever.  Particular secondary boundary conditions in Functional Macroeconomic Dynamics, past and future pricings and quantities, are relatively insignificant for the analysis of the primary relativity immanent in, and applicable to, every instance of the process.  What is significant is the Leibnitz-Newtonian shift of context. [paraphrase in part of McShane, 1980, 127]

A second set of primary relativities dealing with how the process plays out over time is provided in CWL 15, sections 26-28 which treat the cycles of

  • basic income,
  • pure surplus income,
  • the aggregate basic price-spread.

These sections provide the differentials applicable to the phases of the evolutionary process as it works out to the tune of the lagged technical accelerator.

kn[f’n(t-a)-Bn] = f”n-1(t) – An-1  (CWL 15, 37),

per the possibilities of a) the Table of Possibilities on CWL 15, 114, b) Figure 24-7, p. 125 and c) the equations of pages 107-113.

The differentials of the expansionary cycle:

  • dI’Σ(widni+ nidwi+dnidwi)yi       [CWL 15, 134]
  • df= vdw + wdv       [CWL 15, 148-49]
  • P’Q’ = p’a’Q’ + p”a”Q”      [CWL 15, 156-58]
  • d(P’Q’) = d(p’a’Q’)+ d(p”a”Q”)      [CWL 15, 156-58]
  • P’/p’ = a’ + a”(p”Q”)/(p’Q’)      [CWL 15, 156-58], or
  • J = a’ + a”R       [CWL 15, 156-58]
  • d(P’/p’)= dJ= da’ + a”dR + Rda”       [CWL 15, 158]

Among all the possible pure cycles of expansion governed by the second set of differentials would have an exigence throughout for the normative balance of crossovers between circuits required by the first set of primary relativities.  And, as exemplified by Burley’s and Csapo’s characteristic equations and their root solutions [Burley and Csapo, 1992-1], the pure cycle would exhibit a) normative relative intensities of productive activities, and b) normative relative pricing.  And, per the lagged technical accelerator, the pure cycle would implement the magnitude of coefficient k, and the timing indicated by t, t-a, t-b, etc, in that lagged technical accelerator.  Neither too fast nor too slow, neither excessive nor deficient, and dependent upon the state of technology, culture, and institutions.

.VII. Excerpts re the drift to totalitarianism

There is such a thing as progress and its principle is liberty. … However, while there is progress and while its principle is liberty, there also is decline and its principle is bias. There is the minor principle of group bias which tends to generate its own corrective. There is the major principle of general bias and, though it too generates its own corrective, it does so only by confronting human intelligence with the alternative of adopting a higher viewpoint or perishing. To ignore the fact of decline was the error of the old liberal views of automatic progress. The far more confusing error of Marx was to lump together both progress and the two principles of decline under the impressive name of dialectical materialism, to grasp that the minor principle of decline would correct itself more rapidly through class war, and then to leap gaily to the sweeping conclusion that class war would accelerate progress. What, in fact, was accelerated was major decline which in Russia and Germany leaped to fairly thorough brands of totalitarianism. The basic service of the higher viewpoint will be a liberation from confusion through clear distinctions. Progress is not to be confused with decline; the corrective mechanism of the minor principle of decline is not to be thought capable of meeting the issues set by the major principle. [CWL 3, 234-235/259-60]

Cosmopolis is not simpliste. It does not leap from a fact of development to a belief in automatic progress nor from a fact of abuse to an expectation of an apocalyptic utopia reached through an accelerated decline. It is the higher synthesis of the liberal thesis and the Marxist antithesis. It comes to minds prepared for it by these earlier views, for they have taught man to think historically. It comes at a time when the totalitarian fact and threat have refuted the liberals and discredited the Marxists. [CWL 3, 241/266]

As healing can have no truck with hatred, so too it can have no truck with materialism. For the healer is essentially a reformer; first and foremost he counts on what is best in man. But the materialist is condemned by his own principles to be no more that a manipulator. He will apply to human beings the stick-and-carrot treatment that the Harvard behaviorist B.F. Skinner advocates under the name reinforcement. He will maintain with Marx that cultural attitudes are the byproduct of material conditions, and so he will bestow upon those subjected to communist power the salutary conditions of a closed frontier, clear and firm indoctrination, controlled media of information, a vigilant secret police, and the terrifying threat of labor camps. [CWL 15, 104]

A rigidly egalitarian system belongs to a perfectly egalitarian world; (but) a world in which men are, in fact, unequal must find a different system. What system? If the idealism is sentiment without intelligence, it is as likely as not to mate with the underground cynicism of the revolutionaries to foist upon us a dictatorship of the proletariat in which the proletariat does not dictate, a dictatorship of the Herrenvolkin which the Volkobeys the Fuhrer. But if that idealism can be brought too learn the discipline of logic and of scientific reflection, then it will impose a generalization of the exchange economy. To determine the nature of such a generalization is the aim of this inquiry; but at once this is at least evident. The vast forces of human benevolence can no longer be left to tumble down the Niagara of fine sentiments and noble dreams. They have to be assigned a function and harnessed within the exchange system, for in no other way can that system shake off its fictitious fetters to move consistently towards its maximum. [CWL 21, 36]

The idea of engineering human welfare is repugnant to Lonergan, for ‘managing people is not treating them as persons. To treat them as persons one must know and one must invite them to know.’ Making the survival of democracy possible by ‘effectively augmenting the enlightenment of … enlightened self-interest’ cannot be identified merely with the Enlightenment’s project of steering public opinion from unenlightened to enlightened self-interest. Instead, Lonergan envisaged a vast and long-term educational effort. He insisted that rational control of the economy ‘can be democratic only in the measure in which economic science succeeds in uttering not counsel to rulers but precepts to mankind, not specific remedies and plans to increase the power of bureaucracies, but universal laws which men themselves administrate in the personal conduct of their lives.’ [CWL 15, Editors’ Introduction, lxxi]

Lonergan did not think Marx achieved an explanatory grasp of the intelligibility of the economic sphere as such. Marx’s labor theory of value invoked an admixture of political, sociological, and especially proprietorial dimensions. Moreover, Lonergan had no respect for the way an illegitimate importation of sociological categories into the properly economic sphere lends support to the simpliste Marxist-socialist penchant for setting entrepreneurs and workers against each other. Marxist advocacy of group bias and the use of propaganda and violence short-circuit democratic solidarity. To Lonergan’s way of thinking, a moral vision that substitutes propaganda and force for its lack of intellectual acuity is a self-contradiction much more radical than the ‘contradictions’ that supposedly drive dialectical materialism. [CWL 15 Editors’ Introduction, xlvi-xlvii]

(Marx’s) notion of surplus value has sociological and proprietorial dimensions – that is, the difference between the full value bestowed on a commodity by the laborers and what is returned to laborers in the form of wages – rather than the sheerly functional dimensions that constitute its intrinsic meaning for Lonergan. [CWL 15 Editors’ Introduction, lxi ftnt 104]

The helplessness of tolerance to provide coherent solutions to social problems called forth the totalitarian who takes the narrow and complacent practicality of common sense and elevates it to the role of a complete and exclusive viewpoint.  On the totalitarian view, every type of intellectual dependence whether personal, cultural, scientific, philosophic, or religious, has no better basis than non-conscious myth.  The time has come for the non-conscious myth that will secure man’s total subordination to the requirements  of reality. Reality is the economic development, the military equipment, and the political dominance of the all-inclusive State.  Its ends justify all means.  Its means include not merely every technique of indoctrination and propaganda, .. but also the terrorism of a political police, of prisons and torture, of concentration camps, of transported and extirpated minorities, and of total war. [CWL 3, 231-32/256-57]

The laws and principles of scientific macroeconomics are general and universally applicable in all political systems. In the U.S., the government is We-the-free-people collectively, not an independent, autonomous, totalitarian, third party; it is elected by us to re-present us.  We count on it to regulate us responsibly, but it must not rule us in any totalitarian manner.  On the other hand, We-the-people are responsible for understanding and acting according to the precepts yielded by Functional Macroeconomic Dynamics, one of which is to implement and maintain in full the basic expansion.

Unity without freedom is easy: set up a dictator and give him a secret police.  Freedom without unity is easy: let every weed glory in the sunshine of stupid adulation.  But unity and freedom together, that is the problem.  It demands discipline of mind and will: a keenness of apprehension that is not tied down to this or that provincial routine of familiar ideas nor yet has sunk to the jellyfish amorphism of skepticism; a vitality of response to situations that can acknowledge when the old game is done for, that can sacrifice the perquisites of past achievement, that can begin anew without bitterness, that can contribute without anticipating dividends to self-love and self-aggrandizement … much … Chaos can create, but it creates anything at all; it thinks of poison gas as well as anesthetics, and it uses both; it devises financial mechanisms that float brilliant booms and suffer incomprehensible slumps; it builds the wealth of cities and their slums; it inveighs against evil but it has to throw all civilization into the pot of experiment before it can discover whether another novelty will merit a blessing or a curse; it debauches the mind with a babel of contradictions and leaves the will a prey to fantasy and fanaticism. (CWL 21, 20)

In particular, the free private sector and its elected re-presentatives, not the Fed and not a totalitarian central bureaucracy, bear primary responsibility for implementation of the basic expansion, which provides full employment.

In the nineteenth century democracy was the successful political form, (Lonergan) wrote, but times have changed and modern economics aims at replacing democracy with the totalitarian state.  The regimenting of the Russians by the Soviets, of the Germans by the Nazis, and of the Italians by the Fascists are moves towards making the whole world conform.  In contrast the power of the old political economists was solely that of argument, the aim to release the creativity that resides in human beings rather than in ideologies or parties or bureaucracies.  What is needed in economic thinking is a ‘scientific generalization of the old political economy and of modern economics that will yield the new political economy that we need,’ It will be a new point of departure, not unlike that established by Newton in relation to the science of mechanics. It will seek to understand most generally the patterns of relations among certain human activities that make up the economy.  This Lonergan will break down into questions about production, exchange, and finance. [Mathews 2005, 113]

“Not on the facile model of the totalitarian or socialist regimes which simply seek to abolish the problems and with them human liberty, then there will be need not merely for sober and balanced speculation but also for all the concrete inventiveness, all the capacity for discovery and for adaptation, that we can command.” McShane, Profitp. 137

The socialist version of commonsense bias wields the ‘haughty name of welfare’ (MD:ECA 86) and sets up an irrational weighting of entitlements that spawns a permanent underclass.  And so bias has in one way or another kept both capitalist and socialist outlooks from achieving a correct understanding of profit as a ‘social dividend.’ … According to Lonergan, profit as coopted by bias systematically excludes an intelligible account of the ‘social dividend’ which would be the reasonable return on entrepreneurial activity that ramifies throughout the entire society (MD:ECA 133-44, 144-56).  For in the measure that it is unbiased, being an entrepreneur means taking initiative in improving the social and cultural order of a society in its provision of goods and services by transforming and exploiting the means of production. Accordingly, profit as the flow of an economy’s resources for the sake of a major transformation and expansion of capital goods would be ’pure surplus income.’ [CWL 25, Editors’ Introduction lxiv]