.1. Lonergan’s “Macroeconomic Field Theory” (MFT), AKA “Functional Macroeconomic Dynamics” (FMD)

 

  • Functional Macroeconomic Dynamics seeks not merely to “view” and describe the economic process; rather it seeks to understand in order to explain and properly manage the economic process.

Already 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.  … despite their intimate connection, it remains that description and explanation envisage things in fundamentally different manners.  The relations of things among themselves are, in general, a different field from the relations of things to us. (CWL 3, 291/316)

  • FMD is explanatory science. It begins with an insight into the insights whose contents constitute explanatory science: the insights of mathematicians such as Euclid, the Pythagoreans, Newton, Leibnitz, Euler, Descartes, the non-Euclidean geometers, Reimann, Minkowski, Goedel, and Einstein; and natural scientists such as Aristotle, Archimedes, Galileo, Kepler, Copernicus, Newton, Lagrange, Hamilton, Faraday, Clerk-Maxwell, Mendeleyev, Gibbs, Planck, Bohr, Schroedinger, Heisenberg, and Einstein.

… in physics objects are defined through the laws by which they are connected to one another; in chemistry elements are defined through the various series of relations that are found in the periodic table; in physiology organs are defined by the functions they have with regard to the whole body, and so on. (CWL 12, 717)

It is clear that, for Lonergan, real internal relations are known by the sciences, which know created things ‘through their causes,’ that is, through their formal intelligibility.  Prescientific knowledge of things does not know their real internal relations  But that does not mean that it knows things without their relations.  It does mean, though, that the connections or relations are not scientifically established. (C!L 12, 717, ftnt 5)

  • From the insight into the insights one grasps the characteristics of science: a) sets of basic terms defined by their relations to one another, and b) sets of equations coherent with one another in a superstructure which constitutes a whole “system”; i.e. explains a whole systematic unity, such as mechanics, thermodynamics, electromagnetism, special relativity, quantum mechanics, and the economic process.

… a science emerges when thinking in a given field moves to the level of system. Prior to Euclid there were many geometrical theorems that had been established.  The most notable example is Pythagoras’ theorem on the hypotenuse of the right-angled triangle, which occurs at the end of  book 1 of Euclid’s Elements.  Euclid’s achievement was to bring together all these scattered theorems by setting up a unitary basis that would handle all of them and a great number of others as well. … Similarly, mechanics became a system with Newton.  Prior to Newton, Galileo’s law of the free fall and Kepler’s three laws of planetary motion were known.  But these were isolated laws.  Galileo’s prescription was that the system was to be a geometry; so there was something functioning as a system.  But the system really emerged with Newton.  This is what gave Newton his tremendous influence upon the enlightenment. He laid down a set of basic, definitions, and axioms, and proceeded to demonstrate and conclude from general principles and laws that had been established empirically by his predecessors.  Mechanics became a science in the full sense at that point where it became an organized system. … Again, a great deal of chemistry was known prior to Mendeleev.  But his discovery of the periodic table selected a set of basic chemical elements and selected them in such a way that further additions could be made to the basic elements.  Since that time chemistry has been one single organized subject with a basic set of elements accounting for incredibly vast numbers of compounds.  In other words, there is a point in the history of any science when it comes of age, when it has a determinate systematic structure to which corresponds a determinate field. [Method, 241-42]

Newton set down laws of motion and proceeded to demonstrate that if a body moves in a field of central force, its trajectory is a conic section.  He set out with a minimal cluster of insights, definitions, postulates, axioms and proceeded to account for the laws that had previously been empirically established, bringing them into a single explanatory unity.  ¶A single insight yields a conception, a definition, an object of thought; but from a cluster of insights, you build up a system of definitions, axioms, postulates, and deductions.  We have to note that a system is quite an achievement; systems are not numerous. There are Euclid’s geometry and subsequent developments in geometry, Newton’s mechanics and dynamics and the building upon Newton, and the Mendeleev table in chemistry.  System, then, is the expression of a cluster of insights. [CWL 5, 52]

  • One detects the investigators’ exigence to discover the systematics or scientific explanation of the objective field under investigation, whether it be in mathematics, physics, chemistry, or other fields. Further, one notes in the history of mathematics and science the series of advances to more profound unities, higher viewpoints, and more general unifications offering better explanations.

… , Newtonian mechanics is constructed in the same way as was Euclidean geometry.  Kepler’s discovery that the planet Mars and the planets in general moved in ellipses was for Newton a conclusion to be demonstrated.  That was Newton’s great achievement.  He established, by what seemed to be methods parallel to Euclid’s, by rigorous deduction, exactly what Kepler had found by empirical correlations.  Newton demonstrated that if there is a central field of force, that is, a force that causes an acceleration according to the law of inverse squares and is concentrated at the center of a field, then any body moving in that field will move along a conic section, such as an ellipse, a circle, a hyperbola, and so on.  You can see that this theorem includes the common matter; there is something that you can imagine, namely the conic section.  And this type of mechanics is determinist: it includes not only the intelligible form, but also an element of the matter.  On the other hand, quantum theory deals with what it knows to be processes that cannot be imagined.  It is a higher level of abstraction, and getting away from anything that can be imagined is connected with the fact that quantum theory is statistical – …  ¶ So you can see how even the ideas of definition and abstraction have become much more fluid.  Scientific thinking is much more versatile, much more attentive to all the possibilities of the fundamental act that is insight into sensible data.  I have given a series of illustrations of this.  (CWL 10, 126-27)

  • In one’s insight into insights one notes a cumulative five-level structure of knowing: first, experience and imagination; second, insight into image, or act of understanding, yielding concepts and provisional definitions; third, judgment or affirmation of “is”-ness or existence or equality or identity or truth or affirmation; fourth, in the case of what to do, decision; and finally, caritas.
  • One also notes that mathematicians and natural scientists employ both a heuristic structure and a methodof analysis; and they use the technique of implicit definition to reach terms (explanatory conjugates)defined by their relations to one another.

… V. Lenzen in his Nature of Physical Theory emphasizes the genetic process that begins from experiential contents of force, heat, extension, duration, etc., to move through a process of redefinition towards terms implicitly defined by empirically established principles and laws.  .. Lindsay and Margenau in their Foundations of Physics, … may be said to exhibit a preference for terms implicitly defined by equations.  [CWL 3, 81-82/105]

  • Functional Macroeconomic Dynamics is an explanatory theory; as science it employs
    • a heuristic, or guide to the search for a type of answer
    • the technique of implicit definition, to reach basic terms which are mutually definitive, and upon which a superstructure may be deduced to comprise a complete explanation
    • scientific method of measurement, insight yielding terms in relation to one another, and verification of hypothetical explanation

… empirical method involves four distinct elements, namely

      • the observation of data,
      • insight into data,
      • the formulation of the insight or set of insights, and
      • the verification of the formulation. [CWL 3, 78-79/102]
  • FMD seeks, discovers, and formulates the objective “mechanical” structure of the productive system and the correlated system of payments.

We set out to indicate the existence of an objective mechanical structure of economic activity, of something independent of human psychology, of something to which human psychology must adapt itself if economic activity is not to become a matter of standing in a tub and trying to lift it. [CWL 21, 56]

These differences and correlations (of the productive process of a hierarchical, advanced economy) have now to be projected into their monetary correlates to set up classes of payments.  Thus a restrictive supposition is introduced into the argument.  The productive process is now envisaged as occurring in an exchange economy.  It will be supposed to be an economy of notable size, complexity, and development, with property, exchange, prices, supply and demand, money.  [CWL 15, 39]

A study of the mechanics of motor-cars yields premises for a criticism of drivers, precisely because the motor-cars, as distinct from the drivers, have laws of their own which drivers must respect.  But if the mechanics of motorsincluded, in a single piece, the anthropology of drivers, criticism could be no more than haphazard. (CWL 21, 109)

  • Money is understood as a dummy invented by humans to enable a vast and intricate process; money is not a commodity to be hoarded. The concrete economic process of pretio-quantital exchange in the non-systematic manifold of exchanges consists of velocitous production-and-exchange of goods and services for money.  Money is a fellow-traveler – a correlative and a concomitant – with the primary process of velocitous production and saleThe abstract intelligibility of velocitous production and sale is the primary fundamental analyzand.  And money plays the role of a dummy invented by humans to enable and grease the divided exchanges in a large, aggregated, complex, production-and-exchange process.

… money is an instrument invented to fulfill a definite task; it is not the ultimate master of the situation.  … Accordingly money has to conform to the objective exigencies of the economic process, and not vice versa. (CWL 21, 101)

These differences and correlations (of the productive process of a hierarchical, advanced economy) have now to be projected into their monetary correlates to set up classes of payments.  Thus a restrictive supposition is introduced into the argument.  The productive process is now envisaged as occurring in an exchange economy.  It will be supposed to be an economy of notable size, complexity, and development, with property, exchange, prices, supply and demand, money.  [CWL 15, 39]

  • FMD understands the economic process as always the current process manifesting an exigence for a) current concomitance of certain flows with one another, b) ongoing continuity of flows from interval to interval, c) current equilibrium among interdependent flows, and d) solidarity of flows in a unified organic system.
  • The process, as a process, evolves.  It is dynamic; and the scientific heuristic mandates that the analysis and explanation must be adequate to a dynamic process.  It must be understood and formulated in terms of first and second order differentials: d2θ/dt2, d2x/dt2, d2y/dt2.  FMD finds no profound explanatory value in the momentary intersections of the macrostatic IS-LM, and AD-AS modelsThe statement in these models that goods, services, and the rental of money are done at a price is a trivial statement rather than a profound explanation of a dynamic, double-circuited process.
  • FMD is a general theory.  The way out of the morass of the ideas of the conflicting schools and isms is through a generalization based on premises more remote and insights more deep than those of the schools and isms.  The way out is through a more general field.  The generalization would be a sublation of the lower theses and antitheses of the schools and isms.  “It is, we believe, a scientific generalization of the old political economy and of modern economics that will yield the new political economy which we need.  A Copernican revolution is attempted.

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]

As Newton, according to the tale, forgot the distinction between planets swinging through the sky and apples falling in autumnal orchards, as he reached beyond Kepler’s and Galilei’s laws to the profounder unity of the theory of motion, so too we must forget distinctions between production, distribution, and consumption, and reach behind the psychology of property and the laws of exchange to form a more basic concept and develop a more general theory. [CWL 21, 11]

The non-Euclideans moved geometry back to premises more remote than Euclid’s axioms, they developed methods of their own quite unlike Euclid’s, and though they did not impugn Euclid’s theorems, neither were they very interested in them; casually and incidentally they turn them up as particular cases in an enlarged and radically different field. … Einstein went beyond Newton by employing the new geometries to make time an independent variable; and as Newton transformed the formulation and interpretation of Kepler’s laws, so Einstein transforms the Newtonian laws of motion. … It is, we believe, a scientific generalization of the old political economy and of modern economics that will yield the new political economy which we need. … Plainly the way out is through a more general field. [CWL 21, 6-7]

(The) General laws (explaining a concrete process) contain a primary abstract relativity and are applied to the concrete “only through the addition of further determinations, and such further determinations pertain to a non-systematic manifold. … it is not enough to think about the general law; one has to add further determinations that are contingent from the very fact that they have to be obtained from a non-systematic manifold. [CWL 3, 492/516]

Lonergan’s critique (shows that) by using the technique of implicit definition, the emphasis shifts from trying to define the relevant variables to searching heuristically for the maximum extent of interconnections and interdependence; and that the variables discovered in this way might not resemble very much the objects which, in the first instance, one was thinking about.  [Gibbons, 1987]

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.  This technique (implicit definition) has been used to great effect by David Hilbert in his Foundations of Geometry in which, for example, the meaning of a point and a straight line is fixed by the relation that two, and only two points, determine a line.  “The significance of implicit definition is its complete generality.  The omission of nominal definition is the omission of a restriction to objects which, in the first instance, one happens to be thinking about.  The exclusive use of explanatory or postulational elements concentrates attention upon the set of relationships in which the whole scientific significance is contained.”  [Gibbons, 1987, 313]

  • FMD is a normative theory explaining the pure cycle of expansion for which there is an exigence for adaptation of human behavior in a democracy.

The old political economists were champions of democracy; and if the content of their thought has been found inadequate, its democratic form is as valid today as ever.  That form consisted in the discovery of an economic mechanism and in the deduction of rules to guide men in the use of the economic machine, a rule of laissez faire for governments and a rule of thrift and enterprise for individuals … but it is still insufficiently grasped that new and more satisfactory rules have to be devised.  Without them human liberty will perish.  For either men learn rules to guide them individually in the use of the economic machine, or else they surrender their liberty to be ruled along with the machine and a central planning board …the one issue is the locus of control.  Is it to be absolutist from above downwards?  Is it to 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. (reference?)

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.  (Again,) 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)

Clearly schemes of recurrence exist and function.  No less clearly, their functioning is not inevitable.  A population can decline, dwindle, vanish.  A vast technological expansion, robbed of its technicians, would become a monument more intricate but no more useful than the pyramids.  An economy can falter, though resources and capital equipment abound, though skill cries for its opportunity and desire for skill’s product, though labour asks for work and industry is eager to employ it; then one can prime the pumps and make X occur; but because the schemes are not functioning properly, X fails to recur.  As the economy, so too the polity can fall apart. … much …in a twilight of straitened but gracious living men await the catalytic trifle that will reveal to a surprised world the end of a once brilliant day. (CWL 3, 209-210/235)

  • In order to explain the always-current, unified, whole, concrete, organic process, FMD’s analysis is guided by the always-applicable theoretic principles of
    • concomitance (certain monetary flows with one another and flows of types of products and payments with one another)
    • credit (to fill the gap between payments made and payments received; not as an external lever or a magic wand)
    • continuity (from interval to interval)
    • dynamic equilibrium (of monetary flows between analytically distinct circuits)
    • organic solidarity (of the entire process)

 

  • Concomitance is a key feature in order to avoid disequilibrium and possible breakdown.

Concomitance is, I would claim, the key word in Lonergan’s economic thinking. [Philip McShane, [Fusion 1, page 4 ftnt 10]

A condition of circuit acceleration was seen in Section 15 to include the keeping in step of basic outlay, basic income, and basic expenditure, and on the other hand, the keeping in step of surplus outlay, surplus income, and surplus expenditure.  Any of these rates may begin to vary independently of the others, and adjustment of the others may lag.  But any systematic divergence brings automatic correctives to work.  The concomitance of outlay and expenditure follows from the interaction of supply and demand.  The concomitance of income with outlay and expenditure is identical with the adjustment of the rate of saving to the requirements of the productive process. [CWL 15, 144]

  • Inflation, rather than being merely described or emptily postulated, is explained as a lack of concomitant variation of the real flow and the dummy flow, i.e. as disproportionate flows of products and of payments.

It is now necessary to state the necessary and sufficient condition of constancy or variation in the exchange value of the dummy.  To this end we compare two flows of the circulation: the real flow of property, goods, and services, and the dummy flow being given and taken in exchange for the real flow….Accordingly, the necessary and sufficient condition of constant value in the dummy lies in its concomitant variation with the real flow. (CWL 21, 38-39)

(Note to self: Find in CWL 15 inflation as a correction)

  • The form in FMD’s coherent cluster of differential equations must be isomorphic with the structure of velocitous and accelerative flows of two types of products and two classes of correlated payments in the macroeconomic field.

These differences and correlations have now to be projected into their monetary correlates to set up classes of payments.  Thus a restrictive supposition is introduced into the argument.  The productive process is now envisaged as occurring in an exchange economy.  It will be supposed to be an economy of notable size, complexity, and development, with property, exchange, prices, supply and demand, money.  [CWL 15, 39]

  • FMD must be constituted by a cluster of equations which cohere (hang together) in a single, invariant, explanatory, systematic unity.

“There is a point in the history of any science when it comes of age, when it has a determinate systematic structure to which corresponds a determinate field.” [CWL 10, 241-42]

… a science emerges when thinking in a given field moves to the level of system. Prior to Euclid there were many geometrical theorems that had been established.  The most notable example is Pythagoras’ theorem on the hypotenuse of the right-angled triangle, which occurs at the end of  book 1 of Euclid’s Elements.  Euclid’s achievement was to bring together all these scattered theorems by setting up a unitary basis that would handle all of them and a great number of others as well. … Similarly, mechanics became a system with Newton.  Prior to Newton, Galileo’s law of the free fall and Kepler’s three laws of planetary motion were known.  But these were isolated laws.  Galileo’s prescription was that the system was to be a geometry; so there was something functioning as a system.  But the system really emerged with Newton.  This is what gave Newton his tremendous influence upon the enlightenment. He laid down a set of basic definitions, and axioms, and proceeded to demonstrate and conclude from general principles and laws that had been established empirically by his predecessors.  Mechanics became a science in the full sense at that point where it became an organized system. … Again, a great deal of chemistry was known prior to Mendeleev.  But his discovery of the periodic table selected a set of basic chemical elements and selected them in such a way that further additions could be made to the basic elements.  Since that time chemistry has been one single organized subject with a basic set of elements accounting for incredibly vast numbers of compounds.  In other words, there is a point in the history of any science when it comes of age, when it has a determinate systematic structure to which corresponds a determinate field. [CWL 10, 241-42]

As Newton, according to the tale, forgot the distinction between planets swinging through the sky and apples falling in autumnal orchards, as he reached beyond Kepler’s and Galilei’s laws to the profounder unity of the theory of motion, so too we must forget distinctions between production, distribution, and consumption, and reach behind the psychology of property and the laws of exchange to form a more basic concept and develop a more general theory. [CWL 21, 11]

Newton set down laws of motion and proceeded to demonstrate that if a body moves in a field of central force, its trajectory is a conic section.  He set out with a minimal cluster of insights, definitions, postulates, axioms and proceeded to account for the laws that had previously been empirically established, bringing them into a single explanatory unity.  ¶ A single insight yields a conception, a definition, an object of thought; but from a cluster of insights, you build up a system of definitions, axioms, postulates, and deductions.  We have to note that a system is quite an achievement; systems are not numerous. There are Euclid’s geometry and subsequent developments in geometry, Newton’s mechanics and dynamics and the building upon Newton, and the Mendeleev table in chemistry.  System, then, is the expression of a cluster of insights. [CWL 5, 52]

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]

  • Functional Macroeconomic dynamics must be as dynamic as the subject matter under investigation.

Lonergan agreed with Schumpeter on the importance of a 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]

  • FMD formalizes the monetary circulations correlated with functional point-to-point and point-to-line productive relationships as two distinct circuits of circulating payments meeting those rectilinear production activities.

Need the moral be repeated?  There exist two circuits, each with its own final market.  The equilibriumof the economic process is conditioned by the balance of the two circuits: each must be allowed the possibility of continuity, of basic outlay yielding an equal basic income and surplus outlay yielding an equal surplus income, of basic and surplus income yielding equal basic and surplus expenditure, and of these grounding equivalent basic and surplus outlay.  But what cannot be tolerated, much less sustained, is for one circuit to be drained by the other. That is the essence of dynamic disequilibrium. [CWL 15, 175]

  • FMD discovers and analytically distinguishes circuits as accelerator and accelerated functionings and explains the condition of overall equilibrium as the balance of vital, crossover interactions of these accelerator and accelerated functionings with respect to timing and magnitude .
  • Functional Macroeconomic Dynamics insists that, in order to achieve an explanatory field theory, academics and government authorities must surmount their obsession with external causes – final, material, instrumental, efficient.  It must seek the whole, immanent, objective intelligibility of the process and make known the principles and laws to which the participants must adapt.  It must seek, discover, and make known the internal, immanent, formal cause.

Ought there not to be introduced a technical term to denote this type of intelligibility?  … The intelligibility that is neither final nor material nor instrumental nor efficient causality is, of course, formal causality…what we have called the intelligibility immanent in sensible data and residing in the relations of things to one another, might be named more briefly formal causality… [CWL  3, 78/101-102]

  • A physical scientist seeks to understand the immanent intelligibility of systems such as mechanics, thermodynamics, electromagnetism, and special relativity; and the scientist of macroeconomics seeks to understand the invariant intelligibility of the objective economic process; and, prescinding from the subjective human psychology of the participants, she seeks to discover the invariant, field-theoretic immanent intelligibility of the economic process.

Our aim is to prescind from human psychology that, in the first place, we may define the objective situationwith 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]

  • FMD understands that the true aim and goal of science is verification of understanding, NOT exact prediction of merely probabilistic events in a non-systematic manifold of events.

For Lonergan, prediction and control are not legitimate ends of science because they are not the same as verified understanding, which is the true aim of science.  [CWL 15, Editors’ Introduction, ftnt 32, xxxvii]

analysis may attain its goal without being able to predict, … [CWL 15, 11]

  • FMD prescinds from human psychology; it is conceptually and explanatorily prior to and more fundamental than the psychology of the human efficient cause; it explains the objective process to which psychological humans must adapt; human agents are, as it were, outside the field-theoretic laws of the process. FMD adopts the premise for analysis of objective production and exchange rather than of subjective human desires and fears.  Again,

our inquiry differs radically from traditional economics, in which the ultimate premises are not production and exchange but rather exchange and self-interest, or later, exchange and a vaguely defined psychological situation.  Our aim is to prescind from human psychology (so) that, in the first place, we may define the objective situation with which man has to deal, and, in the second place, define the psychological attitude that has to be adopted if man is to deal successfully with economic problems.  Thus something of a Copernican revolution is attempted: instead of taking man as he is or as he may be thought to be and from that deducing what economic phenomena are going to be, we take the exchange process in its greatest generality and attempt to deduce the human adaptations necessary for survival. [CWL 21,42- 43]

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

“The difficulty with a new start is to pinpoint the critical area where economics went astray … I would put it in the middle of the fourth chapter of Volume I of the Wealth of Nations … In (that) chapter, after discussing the need for money in a social economy, Smith suddenly gets fascinated by the distinction between money price, real price, and exchange value and from then on, hey presto, his interest gets bogged down in the a question of how values and prices for products and factors are determined.  One can trace a more or less continuous development of price theory from the subsequent chapters of Smith through Ricardo, Walras, Marshall, right up to Debreu and the most sophisticated present-day Americans.”   (Nicholas Kaldor, the Irrelevance of Equilibrium Economics,” Economic Journal 82 (1972): 1240-41)

  • Invariance:  FMD seeks explanation in the form of an invariant intelligibility of the dynamic process which has an invariant normative exigence for concomitance, continuity, dynamic equilibrium, and orderly pure cycle of expansion.
  • As electromagnetics and special relativity are a set of invariant, field-theoretic relations of functionings among themselves, so is FMD a field theory. It is composed of invariant primary abstract relativities which can be applied to secondary concrete determinations or boundary conditions –, such as the quantities and prices in the non-systematic manifold – in order to derive particular laws. 

physicists surmount their peculiar difficulty (of having to use reference frames) by expressing their principles and laws in mathematical equations that remain invariant under transformations of frames of reference. [CWL 3, 40/  ]

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, not only by an absence of paradigmatic heuristic thinking in a field whose principles involve ends, but also 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, Philip (1980) Lonergan’s Challenge to the University and the Economy, (Washington, D.C.: University Press of America) P. 124)

  • In FMD, experiential terms for the concrete undergo a process of redefinition into abstract explanatory terms for the explanation

… V. Lenzen in his Nature of Physical Theory emphasizes the genetic process that begins from experiential contents of force, heat, extension, duration, etc., to move through a process of redefinition towards terms implicitly defined by empirically established principles and laws.  .. Lindsay and Margenau in their Foundations of Physics, … may be said to exhibit a preference for terms implicitly defined by equations.  [CWL 3, 81-82/105]

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

Paraphrasing [CWL 10, 154]   … again, as to the notion of cause, macroeconomists mistakenly conceive of subjective preferences, interest rates, price levels, inflation, or unemployment, as formal causes.  Functional Macroeconomic Dynamics does not consider these notions as primary or formal; it gets along perfectly well without them.  It thinks in terms of a field theory, the set of relationships between n interdependent, implicitly-defined functional activities.  The field theory of Functional Macroeconomic Dynamics is a set of intelligible functional relations linking functionings which are implicitly defined by the relations themselves; it is a set of relational forms.  The form of any functioning is known through its relations to all other functionings.  ….  Field theory is a matter of the immanent intelligibility of the objective phenomena being investigated.

  • The explanatory theory must be comprised of invariant principles and laws; it must be completely general; it must be at an adequate level of abstraction, and universally explanatory a) of all configurations, and b) in every instance
  • FMD’s analysis is rigorously functional.  The explanatory terms are functions which are defined by the functional relations in which they stand with one another.

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

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

  • FMD makes precise, analytic distinctions. FMD uses the technique of implicit definition to discover fundamental abstract, explanatory terms – such as point-to-point and point-to-line correspondences; and costs as what limit so-called profits – which are defined by the relations in which they stand with one another; i.e. the relations between and among themselves.
  • These abstract basic terms virtually contain an entire explanatory superstructure and theory. These “basic terms” are functional velocities  of applications of component factors of production in a set of point-to-point, point-to-line, point-to-surface, and higher functional correspondences with final composite products, which, when sold, are no longer under the always-current process.  And, as basic-fundamental-foundational, these abstract basic relations virtually contain the deductions of an entire explanatory superstructure and theory.
  • By the nature of a transaction, actual supply and demand are concomitant in any and all transactions
  • Prices and quantities are not understood theoretically as an absolute exogenous given – as in the static IS-LM and AD-AS models; rather they are secondary determinations to be explained in light of the significant explanatory variables and equations, such as P’/p’ = a’ + a”p”Q”/p’Q’
  • The root of the recession or depression is an inability of the efficient-cause-participants to understand a) the difference between real and relative prices vs. monetary and absolute prices, b) the significance of pure surplus income as the monetary correlate of the expansion of the process (f = vw), c) that the process is a finite process and, as finite, has limits, and d) that the criterion of ever-increasing earnings and stock prices is in conflict with the systematic rise and fall of pure surplus income during an expansion in phases.
  • The concept of “exchange value” debunks at a single stroke the mistaken, supposedly-foundational labor theory of value of Smith, Locke, Ricardo, and Marx.

“The difficulty with a new start is to pinpoint the critical area where economics went astray … I would put it in the middle of the fourth chapter of Volume I of the Wealth of Nations … In (that) chapter, after discussing the need for money in a social economy, Smith suddenly gets fascinated by the distinction between money price, real price, and exchange value and from then on, hey presto, his interest gets bogged down in the a question of how values and prices for products and factors are determined.  One can trace a more or less continuous development of price theory from the subsequent chapters of Smith through Ricardo, Walras, Marshall, right up to Debreu and the most sophisticated present-day Americans.”   (Nicholas Kaldor, the Irrelevance of Equilibrium Economics,” Economic Journal 82 (1972): 1240-41)

  • FMD explains the requirement for shifts in the distribution of incomes when the economic process advances through phases.  Expansion of the process is through a series of phases analytically distinguished by comparison of accelerations among analytically-distinct functions.

Just as the surplus expansion is anti-egalitarian in tendency, postulating an increasing rate of saving, and attaining this effectively by increasing, in the main, the income of those who already spend as much as they care to on basic products, so the basic expansion is egalitarian in tendency; it postulates a continuously decreasing rate of saving, a continuously decreasing proportion of surplus income in total income; and it achieves this result effectively by increasing, in the main, the income of those who have a maximum latent demand for consumer goods and services. [CWL 15, 139]

  • Both academics and simple-minded moralists fail to understand the immanent intelligibility of the economic process.

In equity (the basic expansion following the surplus expansion) should be directed to raising the standard of living of the whole society.  It does not.  And the reason why it does not is not the reason on which simple-minded moralists insist.  They blame greed.  But the prime cause is ignorance.  The dynamics of surplus and basic expansion, surplus and basic incomes are not understood, not formulated, not taught….. [CWL 15, 82]

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]

  • FMD’s theory of the velocity of money is based on the aggregates of the magnitudes and frequencies of turnovers. (See CWL 15, 56-59)
  • Thus the measurement of the proper money supply is based on the aggregates of the magnitudes and frequencies of turnovers.
  • Necessary egalitarian and anti-egalitarian shifts in income distribution are predicated upon the phase of the cycle and the formalism of classless, non-tribal income strata. (See CWL 15, 134-35)
  • The utterance “interest” has many meanings but it is to be understood primarily as an internal relation among all explanatory, interdependent, solidary functionings in an expansionary process. (Click here)  This is in contrast to the Fed’s meaning in accordance with which the Fed attempts to price-fix the rental-cost of money as though the interest charge is an always-reliable, effective external lever with which to adjust the objective economic process.
  • In the general case prediction is impossible  in a serial process having scattering conditions in a non-systematic, concrete manifold of events.
  • FMD’s circuits and circulations bear some intelligible resemblance – but only in some respects – to the explanatory science of hydrodynamic flows in connected channels and the explanatory science of electrical-current flows through wires and junctions.  Both involve balanced flows through circuits.
  • The Fed’s main responsibility is to supply the proper amount of money for the volume of transactions which constitute the process.  But, all must admit, the proper amount is not easy to discern. Plus, the private sector – not the Fed – importantly including the industrial-commercial sector and the private banking system, is primarily responsible for enlightened management of the objective economic process. (See especially CWL 15, 53-60)

It is to be observed that there is no simple correlation between quantities of money added to the circuits or subtracted from them and, on the other hand, the rates of flow in the circuits.  For the rates of flow in the circuits are not just quantities of money but quantities multiplied by velocity [CWL 15, 52]

  • In Newtonian mechanics, “work” is integral of force through distance. In macroeconomics, “work” is productive force through the rectilinear series of velocities productive contributions of factors of production.  Elementarily macroeconomic work is the double summation (“integral”) over factors applied at rates by units of enterprise.

…  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]

Now every unit of enterprise involves a turnover magnitude and a turnover frequency.  The statement would be merely a truism if it meant no more than that the rates of payment received and made by the unit of enterprise involved quantities and velocities of money.  But the statement is not a truism, for it involves a correlation between the quantities and velocities of rates of payment and the quantities and velocities of goods and services. (CWL 15, 57)

the quantity alternative in the rates of payment is conjoined with the quantity alternative in the rate of production, and the frequency alternative in the rate of payment is conjoined with the frequency alternative in the rate of production.  The two cases of quantity-velocity are not only parallel but also correlated. (CWL 15, 57)

  • Inflation is explained as disproportionate variation in flows of products and money.   there can be several possible combinations of rates of flow of money outstripping the rates of flow of what money buys – goods and services supplied by units of enterprise and productive services supplied by wage earners at all levels:
    • 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, directly draining money from 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 indirectly drained.
    • The government is incurring a deficit and effecting a superposed circuit so as to flood the basic circuit without any associated increased production of goods and services.
    • 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 nearscope into actuation a current inflation in the actual here and now.
    • Speculation by earlier contributors in the production series results in excess buying of productive services and of liquid inventories
    • Money injected into the bond market for “quantitative easing” may enter and stay in the secondary markets for stocks and bonds and inflate the prices of stocks, bonds, real estate, and luxury items.  This particular swindle would favor those holding stocks and hurt those seeking to purchase stocks.

(Ideally) the dummy must be constant in exchange value, so that equal quantities continue to exchange, in the general case, for equal quantities of goods and services.  The alternative to constant value in the dummy is the alternative of inflation and deflation.  Of these famous twins, inflation swindles those with cash to enrich those with property or debts, while deflation swindles those with property or debts to enrich those with cash; in addition to the swindle each of these twins has his own way of torturing the dynamic flows; deflation gives producers a steady stream of losses; inflation yields a steady stream of gains to give production a drug-like stimulus. [CWL 21, 37-38]

  • Speculative optimism alone may inflate prices in any and all primary and secondary markets.
  • The seemingly endless quandary over how the dynamic process actually works and what are the explanations and significance of the interest rate and of inflation distracts academics, fiscal and monetary authorities, and every financial talk-show “pundit”; and it disorients them into the conventional efficient-cause, shocks-and-dominoes static heuristic and away from the needed functional and explanatory economic analysis and theory which FMD supplies.

The most famous instance of such distractions is John Hicks’ simplistic focus on interest –  in the financial sense  –  in 1937 which turned Keynes’ effort of 1936 into a simpler business of jollying along with IS/LM curves.  (On debates around the IS/LM muddlings, see my Pastkeynes Pastmodern Economics, 65-69) [McShane 2016, 33]