Fundamental Disorientations at the Federal Reserve Bank and the National Bureau of Economic Research

We have arranged this Topic into four parts:

Part I: The Disorientations of Macroeconomists
Part II: Principles and Precepts of Analysis
Part III: A New Textbook, Lonergan’s Macroeconomic Dynamics: A Proto-Textbook in Circulation Analysis
Part IV Comments on The Federal Reserve’s Current Framework For Monetary Policy: A Review and Assessment, by Janice C. Eberly, James H. Stock, and Jonathan H Wright.

Part I: The Disorientations of Macroeconomists

One cannot help but admire and be grateful to the Federal Reserve Bank for its Flows of Funds matrices and the National Bureau of Economic Research for its GDP tables. Great information, well done! However, the Fed, the NBER, and the proponents of the DSGE methodology suffer from fundamental disorientations. The NBER’s descriptive, commonsense, national-income accounting must integrate the Fed’s data on credit and to be recast to provide an explanatory systematization of interdependent flows of products and money. Devotees must reorient themselves.

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, xxviii]

We list some of the disorientations immediately below, then address the issues one by one thereafter. Again, devotees must reexamine their heuristic and reorient their thinking to explanatory systematization of “the way the thing works.”.

.1 They must acknowledge a suitable premise-of-purpose for the economic process

.2 They must view the economic process as always the current process rather than the past or future process

.3 They must understand the economic process as a practically-continuous, purely dynamic process rather than a sporadic series of momentary situations represented by graphic “staticities”

.4 They must adopt a scientific, dynamic heuristic satisfactory for explanation of a dynamic process

.5 They must transition from a theory of efficient cause to a prior and more fundamental field theory, independent of human psychology

.6 In their impression of the role of money, they have master and servant reversed.

.7 They mistakenly conceive the internal Macroeconomic Interest Rate as an external magical lever

.8 They do not understand that concrete relations are composed of abstract primary relativities and concrete secondary determinations from a non-systematic manifold. They accept pricings and pricings’ change as an externally given foundational basis of explanation (in the AD-AS model and the Phillips-Curve correlation) rather than as phenomena to be explained as a) differentiations of primary, significant, explanatory variables, and b) secondary determinations in a non-systematic manifold.

.9 They don’t fully appreciate the rigors of the scientific method; and they lack a sufficiently scientific spirit.

.10 They don’t adequately understand the conditions of prediction.

.11 Their basic terms are commonsense-descriptive terms rather than explanatory conjugates of scientific significance implicitly defined by their functional relations to one another. Thus their concepts fail to qualify as of scientific significance and cannot serve as the foundation of a superstructure of coherent relations comprising a complete theory.

.12 They mistake secondary boundary conditions for primary relativities.

.13 Their single-circuit system obviates the systematization of the rhythms of systematic surges and taperings in two or more circuits of production and exchange.

.14 They don’t grasp the intelligibility of the self-healing of the economic process, so as to distinguish the self-healing from the effect of the artifice of the Fed’s external manipulation of interest rates.

.1 They must acknowledge a suitable premise of purpose for the economic process

Functional Macroeconomic Dynamics affirms the economic process as a system of production and exchange. As a system, it has objective, scientific laws to which the participants must adapt.

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 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]

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 motors included, in a single piece, the anthropology of drivers, criticism could be no more than haphazard.[CWL 21, 109]

.2 They must view the economic process as always the current process rather than the past or future process.

A current planetary orbit or the current swinging of a pendulum is a current process. The scientist is interested in a formulation of the process which is general, universally relevant, and always currently applicable in all instances. He is not particularly interested any more in Brahe’s catalog. He has become now more interested in Kepler’s, Newton’s, and Einstein’s law of the process.

The productive process is, then, the (current) aggregate of activities proceeding from the potentialities of nature and terminating in a standard of living. Always it is the current process, and so it is distinguished both from the natural resources, which it presupposes, and from the durable effects of past production. [CWL 15, 20]

.3 They must understand the economic process as a practically continuous purely dynamic process rather than a sporadic series of “staticities.”

They must understand the economic process as a purely dynamic process in which circulations of money must meet the velocities and accelerations of production, and in which prices are to be interpreted in the light of the significant variables of the primary relativities.

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

… the productive process was defined as a purely dynamic entity, a movement taking place between the potentialities of nature and products. In the present section, there has been attempted a dynamic division of that entity.. Elements in the process are in a point-to-point, or point-to-line, or point-to-surface, or even some higher correspondence with elements in the standard of living. … The division is not based upon proprietary differences, … for the same firm may be engaged at once in different correspondences with the standard of living. Again, it is not a division based upon the properties of things; the same raw materials may be made into consumer goods or capital goods; and the capital goods may be point-to-line or point-to-surface or a higher correspondence; they may have one correspondence at one time and another at another. … the division is, then neither proprietary nor technical. It is a functional division of the structure of the productive process: it reveals the possibilities of the process as a dynamic system, though to bring out the full implications of such a system will require not only the next two sections, on the stages of the process, but also later sections on cycles. [CWL 15, 26-7]

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]

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]

.4 They must adopt a scientific, dynamic heuristic satisfactory for explanation of a dynamic process. Again,

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]

.5 They must transition from a theory of efficient cause to a prior and more fundamental field theory, independent of human psychology

Functional Macroeconomic Dynamics is not, like DSGE, a theory of random fitful shocks, then guesses about what might be the subsequent series of adjustments in the non-systematic manifold. It is a field theory of relations among n functionings, in which the functionings are defined by the functional relations in which they stand with one another. It is purely relational.

Also, the process is an objective process prior to and more fundamental than human psychology.

our inquiry differs radically from traditional economics, in which the ultimate premises are not production and exchange but rather exchange and self-interest, or later, exchange and a vaguely defined psychological situation. Our aim is to prescind from human psychology 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. [CWL 21,42- 43]

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]

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]

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 nobjects. 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

again, as to the notion of cause, macroeconomists mistakenly conceive of subjective preferences as primary explanatory conjugates of the process. Functional Macroeconomic Dynamics drops the notion of subjective preferences; it gets along perfectly well without it. 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. …. The field theory of macroeconomics is a matter of the immanent intelligibility of the objective, dynamic functional process.

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]

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

Einstein’s special relativity is a transposition of that Newtonian idea from mechanics to electromagnetics, and from a causal theory to a field theory. What is occurring in special relativity is a new way of determining the level of what one abstracts from. [CWL 10, 125]

.6 In their impression of the role of money, they have master and servant reversed.

Money is to buy things. Money is an instrument invented by man to advance beyond barter and enable the conducting of a vast and intricate economic process.

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, xxviii]

Money is a dummy. Money was invented to serve the production-and-exchange process. The process was not invented so as to be a respondent servant to the manipulation of the money supply.

Money is an instrument invented by man to make possible a large and intricate exchange process. 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. [CWL 21, 104]

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 is to buy things offered for sale, e.g. to purchase the services of workers for productive contributions or to purchase final goods offered by units of enterprise for consumption. The payments of money in the production-for-exchange process are congruent with the network of the production-for-exchange process. Money does not rule the process. It serves the process.

These differences and correlations (of the primary 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 (primary) 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]

Our immediate task is to work out the correlations that exist between the velocity and accelerator rhythms of production and the corresponding rhythms of income and expenditure. The set of such correlations constitutes the mechanical structure, a pattern of laws that stand to economic activity as the laws of mechanics to buildings and machines. [CWL 21, 43]

… (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 productive process yields consumer goods and capital goods. It exhibits magnitudes and frequencies of turnovers. These are correlated with magnitudes and frequencies of payments. And, voila! you get a new theory of the velocity of money to help the Fed and the banking system perform the difficult task of managing the money supply. (Click here for Notes Regarding FRB Monetary Policy and a Theoretic of Credit)

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]

So, first, the macroeconomist analyzes and systematizes the intrinsically-cyclical nature of the productive process;

then, second, the macroeconomist projects the structure of this dynamic process onto payments to get classes of payments which correspond with the sequential production and sale activities. Thus the systematization provides the norms for the circulation of money for continuity and equilibrium in the process.

every product of the exchange economy must mate through exchange with some other product, and the ratio in which the two mate is the exchange value. [CWL 21, 34-35]

… when we say that the idea of money as a system of public bookkeeping has to be worked out and applied, we mean above all the necessity of a money whose laws (the laws of issuance from the Redistributive Function to the justifying Supply Function and the laws of circular flows within each circuit and between interdependent circuits) coincide with the laws of the economic process, so that instead of conflict between real (productive) possibility and financial possibility[2]we shall have harmony, [CWL 21, 105]

.7 They mistakenly conceive the internal Macroeconomic Interest Rate as an external magical lever

Click here for The Significance of Burley’s and Csapo’s Characteristic Equation and Its Root Solution.

Click here for Interest Rates and Payments.

(Functional Macroeconomic Dynamics’) account (of the monetary distributions scientifically distinguished as basic and surplus incomes) springs from a (scientific) characterization of possible types of productive rhythms which lead (in turn) to the (scientific) specification of the adequate human adaptation to the demands of the (intrinsically cyclical) process, and also to (an identification and) determination of inadequate strategies of adaptation such as variations of interest rates, varieties of taxation and monetary policy. [McShane, 1980, 125]

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 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]

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]

The most famous instance of such distraction ( i.e,. the use of conventional meanings of investing and interest, the monetary aspects of economic dynamics that distract from the needed functional economic analysis) 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]

.8 They do not nderstand that concrete relations composed of abstract [romary relativities and concretesecondary determinations from a non-systematic manifold. They accept pricings and pricings’ change as an externally given foundational basis of explanation (in theAD-AS model and thePhillips-Curve correlation)rather than as phenomenato beexplained asa)differentiations ofprimary, significant, explanatory variables, and b)secondary determinations in a non-systematic manifold.

Click here for The Two Components of Concrete Relations.

.9 They don’t fully appreciate the rigors of the scientific method; and they lack a sufficiently scientific spirit.

In CWL 3 Lonergan treated the six canons of empirical method:

The Canon of Selection (CWL 3, 71/94)
The Canon of Operations (CWL 3, 74/97)
The Canon of Relevance (CWL 3, 76/99)
The Canon of Parsimony (CWL 3, 78/102)
The Canon of Complete Explanation (CWL 3, 84/107)
The Canon of Statistical Residues [CWL 3, 86/109]

Back, then, to the parallel with physics. The introduction of a new distinction places a huge burden on the physics community to shuffle previous data, to take a new and precise view on present and future data. Is this one of the reasons why the present distinction is unwelcome in economics? … I am inclined to think that the main difficulty is the subtle absence of the scientific spirit in contemporary economics. That suspicion might be ridiculed on the grounds that contemporary economics is above all scientific: look at the graduate texts, look at the research papers, both abounding in mathematical subtlety. … There is nothing wrong with mathematical subtlety or rigor: the rigormortisbelongs to the absence of significant variables coupled regularly with the absence of empirical and pragmatic perspective; a case in point is the sophistications of rational expectations theory. … The real difficulty is in the scientific perspective that can come to grips with precise functional distinctions. [McShane 2002-2, 21-22]

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, xxviii]

.10 They don’t adequately understand the conditions of prediction.

Click here for Prediction is Impossible in the General Case.

.11 Their basic terms are commonsense-descriptive terms rather than explanatory conjugates of scientific significance implicitly defined by their functional relations to one another. Thus their concepts fail to qualify as of scientific significance and cannot be the foundation of a superstructure of coherent relations comprising a theory.

A distinction has been drawn between description and explanation. Description deals with things as related to us. Explanation deals with the same things as related among themselves. … description supplies, as it were, the tweezers by which we hold things while explanations are being discovered or verified, applied or revised. But despite their intimate connection, it remains that description and explanation envisage things in fundamentally different manners…. The scientist selects the relations of things to us that lead more directly to knowledge of the relations of things among themselves. Ordinary description is free from this ulterior preoccupation. [CWL 3, 291-92/316-17]

Because the scientific explanation requires terms related to one another, the scientific macroeconomist seeking explanation uses the technique of implicit definition to get interdependent terms related functionally to one another

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]

Explanation must be in terms implicitly defined by their functional relation to 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]

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) which, in the first instance, (the non-methodologist) was thinking about. [Gibbons 1987, 313]

.12 They mistake secondary boundary conditions for primary relativities

Click here for The Two Components of Concrete Relations.

Frisch’s failure to develop a significant theory typifies the failure of economists who search for a dynamic heuristic. As well as a fundamental disorientation of approach there is also a tendency to shift to an inadequate level of abstraction with a premature introduction of boundary conditions in a determinate set of differential and difference equations. [McShane, 1980, 114]

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 nosof profits, wages, prices, etc., into explanation, when in fact the priora quoad nos[3]are last in analysis: they require explanation. [McShane, 1980,124][4]

conjugate forms (such as basic income flow, ordinary surplus income flow, and pure surplus income flow FMC) are defined implicitly by their explanatory and empirically verified relations to one another. Still, such relations are general laws; they hold in any number of instances; they admit application to the concrete only through the addition of further determinations (such as the concrete differentiations of primary variables, price and quantity FMC), and such further determinations pertain to a non-systematic manifold. There is then, a primary relativity that is contained in the general law[5]; it is inseparable from its base in the conjugate form which implicitly it defines; and to reach the concrete relation that holds at a given place and time, it is not enough to think about the general law; one has to add further determinations (such as price and quantity FMC) that are contingent from the very fact that they have to be obtained from a non-systematic manifold. [CWL 3, 492/516]

.13 Their single-circuit system obviates the systematization of the rhythms of systematic surges and taperings two or more circuits of production and exchange.

The production-for-sale process is intrinsically cyclical; it has a structure and rhythms: more on this level now to enable more on that lower level later, then more on that lower level later thanks to more on this level now.

k_n[f’_n(t-a)-B_n] = f”_n-1(t) – A_n-1_{(CWL 15, 37)}

Macroeconomists need to take careful notice of the temporalities; they fail to grasp precisely the implications as to

a) number of levels of production,
b) number of circuits of monetary flows,
c) time lags, and
d) requirement for additional credit money

of the precise analytical distinctions between current-determinate-point-to-current-determinate-point and current-determinate-point-to-indeterminate-future-points; they fail to grasp the production rhythmics implied by the lags (t-a), (t-b), etc, explicated in Figure 24-7 and Figure 27-1. ♩♫♬♪

First, then, there is a wave-like structure that places the accelerated production of producer goods in advance of the consequent acceleration of the production of consumer goods. [CWL 15, 14]

cycles are inherent in the very nature of a long-term acceleration of the productive process. [CWL 15, 36-37]

McShane’s brief paragraph implies a scathing criticism of present-day macroeconomists, whether they be theorists or engineers of change:

(Functional Macroeconomic Dynamics’) account (of the monetary distributions scientifically distinguished as basic and surplus incomes) springs from a (scientific) characterization of possible types of productive rhythms which lead (in turn) to the (scientific) specification of the adequate human adaptation to the demands of the (intrinsically cyclical) process, and also to (an identification and) determination of inadequate strategies of adaptation such as variations of interest rates, varieties of taxation and monetary policy. [McShane, 1980, 125]

if the mechanics of the intrinsically cyclical, macroeconomic mechanism included, in a single piece, the anthropology of households and firms, criticism could be no more than haphazard. [CWL 21, 109]

In the crisis of the 1930’s Hayek attached great importance to the “newly created equipment designed to produce other capital goods”. More modern industry, with its robot factories, involves very complex multi-stage versions of this kind of production. We will clearly need a good general model of production systems of this dynamic kind to discuss the impact of modern innovations. [P. Burley, 1993, 252]

.13 They don’t grasp the intelligibility of the self-healing of the economic process, so as to distinguish it from the effect of the artifice of the Fed’s external manipulation of interest rates.

There have been in history many economic crises. (Google economic crises) But they weren’t the end of everything. Long before any interventions by the Fed or deficit spending by the government, the sick economic process managed to heal itself.

until the position of the strong¹is undermined by the general and prolonged contracting, the requirement²for 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 minimum^3b, any further reduction of the basic stage means that a zero dQ”/Q” is greater than a negative dQ’/Q’; this postulates⁴an 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 equilibrium⁷give 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]

Part II: Principles and Precepts of Real Analysis

Real analysis is not the building of collapsible monetary castles in the air.

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]

In this Part II, we are suggesting that real analysis of the objective economic process be conducted in an orderly manner. The sequence is outlined immediately below; elaboration follows the outline.

.1 Begin the analysis from matters of fact.
.2 Choose the premise suitable for a real analysis yielding a theory which explains the real economic process; e. how the process really works.
.3 Distinguish commonsense description from scientific explanation
.4 Put questions in the right order to get fundamental terms of scientific significance.
.5 Since real analysis is identifying money with what money buys, analyze the productive process first.
.6 Understandthat the productive process is dynamic; adopt a scientific, dynamic heuristic and a Leibnitz-Newtonian shift of context.
.7 The process is not explained as quantum leaps or shocks and adjustments. Rather it is explained as the current, dynamic, practically continuous
.8 Understand the idea of System and how it emerges.
.9 Understand the idea of a mechanism.
.10 Prescind from psychology, anthropology, and sociology to discover the primary and most fundamental laws of the objective process.
.11 Use the technique of implicit definition to discover concepts implicitly defined by their functional relations to one another, and thus of scientific significance, as shown in the Diagram of Rates of Flow.
.12 Search for conjugates which will completely explain the economic process; make precise analytical distinctions upon which a superstructure of relations can be built: e.g. point-to-point vs. point-to-line vs. point to surface correspendence; and velocitous and accelerative functionings such as velocities and accelerations defined by the relations in which they stand interdependently with one another.
.13 The theory must be normative
.14 The analysis is an analysis of functional interactions. Discover the full set of relations comprising a normative explanatory theory; seek a complete theory in which all equations cohere with one another to constitute complete explanation – in contrast to a mere congeries of isolated, unrelated insights.
.15 Seek a field theory of pure relations in order to transcend and sublate the mushy efficient-cause theory of psychological preferences and utility.
.16 Project the correlations of the productive process onto the field of payments to define classes of payments correlated with analytically prior, interdependent, analytical, explanatory production functionings.
.17 Develop a new theory of the velocity of money for practical application to the managing of the money supply.
.18 Understand the microeconomic basis of macroeconomic monetary flows
.19 Explain the significance of concomitance to achieve continuity in the circulations of money.
.20 Grasp the concept of dynamic equilibrium and discover the conditions of dynamic equilibrium in a multi-correspondenced system of interdependent flows.
.21 Understand the principle of how to avoid inflation and deflation; dummy money must be constant in exchange value.
.22 Grasp how and why long-term expansion is a massive affair.
.23 Understand that the interest rate is an internal relation, one aspect among several aspects of a complex but unitary set of relations.
.24 Grasp how the process should normatively expand in pure cycles composed of a series of phases.
.25 Grasp the idea of the Redistributive Function as a) containing reserves in the form of negotiable instruments for operative and retirement contingencies, and b) the source of money for allocation to economically justified activities, and c) the expansion of the process.
.26… Understand the possible bifurcation of purchasing powerbetween the operative circuits and the secondary markets
.27… Understand that savings are not to be identified as an increase in the money supply
.28 Grasp how the pure surplus expansion and its pure surplus income initially play out
.29 Understand, so as to be able to explain, how the basic expansion and its correlative basic receipts and expenditures should play out; and explain, rather than merely postulate as given, the existence and consequences of the failure to implement the basic expansion.
.30 Come to understand that prices and quantities are not external given absolutes constituting the basis of an explanatory theory – as mistakenly conceived in IS-LM, AD-AS, and Phillips Curve schemes.
.31 Consider similarities between Einstein’s a) redefinition of space and time by a four-dimensional spatio-temporal tensor in his special theory, and b) general relativity identifying the metric tensor (representing the curvature of space determined by the distribution of matter) with the energy-momentum tensor with Lonergan’s a) definition of pretio-quantital vector-dot-product flows, and b) relativistic identity of costs and revenues.
.32 Compose for free people plain precepts of adaptation to the requirements of the normative process.

.1 Begin the analysis from matters of fact.

… analysis begins from matters of fact, say, the conspicuous recurrences of changes in plant and equipment and the concomitance of such changes with the business cycle. Next analysis turns from such instances of concomitance to lists of both successful and unsuccessful changes. Finally, from a study of such instances, by a process of trial and error, analysis aims to arrive at an ever fuller understanding of business cycles. [CWL 15, 9]

.2 Choose the premise suitable for a real analysis yielding a theory which explains the real economic process; i.e. how the process really works.

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 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. [CWL 21,42- 43]

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]

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]

.3 Distinguish commonsense description from scientific explanation

A distinction has been drawn between description and explanation. Description deals with things as related to us. Explanation deals with the same things as related among themselves. … description supplies, as it were, the tweezers by which we hold things while explanations are being discovered or verified, applied or revised. But despite their intimate connection, it remains that description and explanation envisage things in fundamentally different manners…. The scientist selects the relations of things to us that lead more directly to knowledge of the relations of things among themselves. Ordinary description is free from this ulterior preoccupation. [CWL 3, 291-92/316-17]

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; [CWL 15, Editors’ Introduction liii]

Lonergan rejected a simplistic summation of the corporate controller’s GAAP management-and-reporting accounts as indexes for explanation of the dynamic economic process.

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]

.4 Put questions in the right order to get fundamental terms of scientific significance.

Questions cannot be put in any order whatsoever. Some questions simply cannot be answered until others have been resolved. And sometimes the answers to one question immediately provide the answers to others. [CWL 12, 23]

… the questions are put in such an order that, once the first is solved, the solutions to the others follow with almost no difficulty. Therefore, because the later solutions are connected to the first as conclusions are connected to some principle, all solutions after the first seem to be the proper province of knowledge. [CWL 12, 25]

… if solving the first problem virtually solves all the others, the concepts and terms in which the first problem and the first solution are defined and expressed cannot be significantly changed if they are to serve to define and express the later problems and solutions. Clearly, then, it is not the arbitrary malice of professors but the interconnected questions and solutions themselves that demand both systematically formed concepts and a technical terminology that corresponds not to any concepts whatsoever but to systematic concepts. [CWL 12, 25]

.5 Since real analysis is identifying money with what money buys, analyze the productive process first.

Money is to buy things. Money is an instrument invented by man to advance beyond barter and enable the conducting of a vast and intricate economic process.

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, xxviii]

Money is a dummy. Money was invented to serve the production-and-exchange process. The process was not invented so as to be a respondent servant to the manipulation of the money supply.

Money is an instrument invented by man to make possible a large and intricate exchange process. 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. [CWL 21, 104]

.6 Understandthat the productive process is dynamic; adopt a scientific, dynamic heuristic and a Leibnitz-Newtonian shift of context.

Taking into account past and (estimated) future values does not constitute the creative key transition to dynamics. Those familiar with elementary statics and dynamics (in physical mechanics) will appreciate the shift in thinking involved in passing from equilibrium analysis (of for example a suspended weight or a steel bridge)…to an analysis where attention is focused on second-order differential equations, on d²θ/dt², d²x/dt², d²y/dt², on a range of related forces, central, friction, whatever. Particular boundary conditions, “past and future values” are relatively insignificant for the analysis. What is significant is the Leibnitz-Newtonian shift of context. [McShane, 1980, 127]

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]

The maintaining of a standard of living is attributed to a basic process (distinct process 1), 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 are concentrated in a redistributive function, whence may be derived changes in the stock of money (distinct process 3) dictated by the acceleration (positive or negative) in the basic and surplus stages of the process. … So there is to be discerned a threefold process in which a basic stage is maintained and accelerated by a series of surplus stages, while the needed additions to or subtractions from the stock of money in these processes is derived from the redistributive area. … it will be possible to distinguish stable and unstable combinations and sequences of rates in the three main areas and so gain some insight into the long-standing recurrence of crises in the modern expanding economy. [CWL 15, 53-54]

The textbooks’ Walrasian intersection of supply and demand curves is exact but it is not complete.

Leon Walras developed the conception of the markets as exchange equilibria. Concentrate all markets into a single hall. Place entrepreneurs behind a central counter. Let all agents of supply offer their services, and the same individuals, as purchasers, state their demands. Then the function of the entrepreneur is to find the equilibrium between these demands and potential supply. … The conception is exact, but it is not complete. It follows from the idea of exchange, but it does not take into account the phases of the productive rhythms. … [CWL 21, 51-52]

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 development of economic dynamics within the present perspective will have its clusters of differential equations and probability functions. [McShane, 2002-2, 68]

Thus, some of our core equations regarding accelerations and changes of key ratios:

dI’₌Σ(w_idn_i+ n_idw_i+dn_idw_i)y_i[CWL 15, 134]
The differential equation specifying how to adjust of the rate
of saving to the requirements for consumption vs. investment of the productive phase

d(P’Q’) = d(p’a’Q’)_Basic+ d(p”a”Q”)_Ordinary_Surplus[CWL 15, 157-58]
Differentials giving acceleration of expended incomes (P’Q’)and “macroeconomic costs” (p’a’Q’)_Basic+ (p”a”Q”)

δJ = δa’ + a”δR + Rδa” [CWL 15, 160]
The differentials of the basic price-spread ratio

d(Π”Κ”_{Purely expansionary})= d( π”a”Κ”_{Purely expansionary})
Differentials of the expansion of investment

δf = vδw + wδv [CWL 15, 148-49]
The differentials of the behavior of the pure-surplus-income ratio

d(ΣF_i)= d(vI”) [CWL 15, 150]
The differentials of pure surplus income

M’ = (S’ – s’O’) + (D’ – s’I’) + G [CWL 15, 51]
The addition of money to the basic circuit

Σds_i= Σr_idv_i [CWL 21, 140]
Increments in monetary circulating capital devoted to transitional payments

Prices are not a first, given, absolute upon which an explanation of the economic process is to be constructed. Rather than being explanatory, they require explanation. They are last in the analysis and defined as constituents of velocitous and accelerating flows. And it is the relations among the interdependent velocitous flows that constitute the absolutes upon which the explanation is to be constructed.

Also see Revision of the NIPA into explanatory form:

The productive process is, then, the (current) aggregate of activities proceeding from the potentialities of nature and terminating in a standard of living. Always it is the current process, and so it is distinguished both from the natural resources, which it presupposes, and from the durable effects of past production. [CWL 15, 20]

I am inclined to think that the main difficulty is the subtle absence of the scientific spirit in contemporary economics. … There is nothing wrong with mathematical rigor: the rigor mortis belongs to the absence of significant variables coupled regularly with the absence of empirical and pragmatic perspective; a case in point is the sophistication of rational expectation theory. …; The real difficulty … is in the scientific perspective that can come to grips with precise functional distinctions. … What a priori arrogance can make a science that is in a mess pass judgment on the worth of an obvious distinction … ? [McShane 2002-2, 22]

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) which, in the first instance, (the non-methodologist) was thinking about. [Gibbons 1987]

.7 The process is not explained as quantum leaps or shocks and adjustments. Rather it is explained as the current, dynamic, practically continuous process.

Although, to demonstrate principles, we often posit an initially stable economic process, in fact the process is always changing or shifting. Creative inventors are inventing. Risk-taking doers are starting new units of enterprise. Laggards are going into bankruptcy. Some are retiring from the workforce; others are entering. Opinions, styles, and mores are subject to change. Optimism prevails, or pessimism holds sway.

Some developments are gradual; others are sudden. Some are major; others are of little consequence. The economic process is not to be analyzed in terms of sporadic “big shocks” or quantum leaps of supply curves or demand curves. Rather, for analysis, it is the case that there are primary principles and laws which are general and universally relevant; and there are secondary determinations in the non-systematic manifold of pretio-quantital events which, in the general case, cannot be predicted.

… even when the laws involved in the process are thoroughly understood, even when current and accurate reports from usually significant centres of information are available, still such slight differences in matters of fact can result in such large differences in the subsequent course of events that deductions have to be restricted to the short run and predictions have to be content with indicating probabilities. So perhaps it is that astronomers can publish exact times of the eclipses of past and future centuries (using “classical laws”) but meteorologists need a constant supply of fresh and accurate information to tell us about tomorrow’s weather [CWL 3, 51/74] [17]

See Prediction is Impossible in the General Case.

[8/13/19] Now it is important to distinguish two different aspects of equations (39) and (42).[1] Under a certain aspect these equations express a truism: if entrepreneurial receipts and payments equate, then they equate not only among entrepreneurs but also between entrepreneurs and the third party, demand. But under another aspect the same equations, so far from expressing an necessary truth, express an almost unattainable ideal, namely a dynamic equilibrium to which any actual process continually attempts to approximate by varying prices and changing quantities of supply. To study the truism is to study bookkeeping, to study the art of double entry, and to learn the magic of the variable items, profit and loss, which perforce make the books balance. To study the ideal is to study equilibrium analysis. The bookkeepers are wise after the event. But if the entrepreneurs are to be wise, they have to be wise before the event, for their payments precede their receipts, and the receipts may equal the payments but they may also be greater or less, to give the entrepreneur a windfall profit or loss. Such justification or condemnation of payments by receipts the bookkeeper records but the entrepreneur has to anticipate, and the grounds of his anticipations, their effects upon his decisions, and the interaction of all decisions form the staple topic of equilibrium analysis. Now the viewpoint of the present discussion is neither that of the bookkeeper nor that of the equilibrium analyst. Equations (39) to (42) are regarded not as a set of facts recorded by bookkeepers, nor as an ideal which entrepreneurs strive yet fail to attain, but as a first approximation to the law of circulation in the basic circuit. The first approximation to the law of projectiles is the parabola: one might, if one chose, consider the projectiles as aiming at or tending towards the ideal of the parabola yet ever being frustrated by wind resistance; one might elaborately describe the trajectory of the projectile as an indefinite series of parabolas, each one in succession the goal of its tendency only to be deserted because adverse circumstance set it on another track. In such a description of trajectories there is to be found at least a superficial resemblance with the statement that an economy is tending towards equilibrium at every instant, though towards a different equilibrium at every successive instant. But whatever the resemblance, and however deep and significant the difference, we here propose to take a circuit and examine first the implications of this law and then the second approximations that are relevant to our inquiry. [CWL 21, 142-43] [19]

.8 Understand the idea of System and how it emerges.

… 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]

A mere congeries of laws will not suffice. For if one is to operate upon the concrete, one must be able to employ at once several laws. To employ several laws at once, one must know the relations of each law to all the others. But to know many laws, not as a mere congeries of distinct empirical generalizations, but in the network of interrelations of each to all the others, is to reach a system. [CWL 3, 76/99] [31]

Thus, in The Two Components of Concrete Relations, we recognize a first set of laws, all related per the Diagram of Rates of Flow, and a second set of laws explaining how an expansionary process plays out.

.9 Understand the idea of a mechanism.

Our immediate task is to work out the correlations that exist between the velocity and accelerator rhythms of production and the corresponding rhythms of income and expenditure. The set of such correlations constitutes the mechanical structure, a pattern of laws that stand to economic activity as the laws of mechanics to buildings and machines. [CWL 21, 43]

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 motors included, in a single piece, the anthropology of drivers, criticism could be no more than haphazard.[2][CWL 21, 109]

if the mechanics of the intrinsically cyclical, macroeconomic mechanism included, in a single piece, the anthropology of households and firms, criticism could be no more than haphazard. [3] [Paraphrasing CWL 21, 109]

On such a methodological model (i.e. implicit, explanatory definition replacing nominal definition and accountant’s categories)… classes of payments quickly become rates of payment standing in the mutual conditioning of a circulation; to this mutual and, so to speak, internal (monetary) conditioning there is added the external (monetary) conditioning that arises out of transfers of money from one circulation to another; in turn this twofold conditioning in the monetary order is correlated with the conditioning constituted (in the hierarchical productive order) by productive (and sequential) rhythms of goods and services;[4]and from the foregoing dynamic configuration of conditions during a limited interval of time, there is deduced a catalogue of possible types of change in the configuration over a series of intervals. There results a closely knit frame of reference that can envisage any total movement of an economy as a function of variations in rates of payment, and that can define the conditions of desirable movements as well as deduce the causes of breakdowns. Through such a frame of reference one can see and express the mechanism to which classical precepts are only partially adapted; and through it again one can infer the fuller adaptation that has to be attained. [CWL 21, 111]

.10 Prescind from psychology, anthropology, and sociology to discover the primary and most fundamental laws of the objective process.

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 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. [CWL 21,42- 43]

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]

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 motors included, in a single piece, the anthropology of drivers, criticism could be no more than haphazard. [5]CWL 21, 109

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 productive rhythms 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]

Back, then, to the parallel with physics. The introduction of a new distinction places a huge burden on the physics community to shuffle previous data, to take a new and precise view on present and future data. Is this one of the reasons why the present distinction is unwelcome in economics? … I am inclined to think that the main difficulty is the subtle absence of the scientific spirit in contemporary economics. That suspicion might be ridiculed on the grounds that contemporary economics is above all scientific: look at the graduate texts, look at the research papers, both abounding in mathematical subtlety. … There is nothing wrong with mathematical subtlety or rigor: the rigormortisbelongs to the absence of significant variables coupled regularly with the absence of empirical and pragmatic perspective; a case in point is the sophistications of rational expectations theory. … The real difficulty is in the scientific perspective that can come to grips with precise functional distinctions. [McShane 2002-2, 21-22]

We set out in this chapter 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]

.11 Use the technique of implicit definition to discover concepts implicitly defined by their functional relations to one another, and thus of scientific significance, as shown in the Diagram of Rates of Flow.

You can define a circle as a perfectly round plane curve, and you would have the same sort of useless definition of a circle as you have of a straight line. If you define a circle, though, as a locus of points equidistant from a center, then you don’t need any postulate that all radii of the same circle are equal. You have it in your definition. So here (in the first case) you have just description of what you look at; here (in the second case) you have what’s equivalent to a description, because it enables you to pick out the proper use of the name ‘circle,’ and at the same time it gives you a postulate about circles. Now the implicit definition pulls a fast one. It drops out all descriptive reference and saves only the postulational elements. ¶ when you’re using implicit definitions, you’re solving problems with perfect generality. For example, geometers discovered that in projective geometry there are parallelisms: What will hold for a point and a plane will hold for two other things. Well, instead of working out all their theorems twice, they get some more general definition and work the whole thing out once. That’s the importance of implicit definition: it is a perfect generality. [CWL 18, 328]

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]

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) which, in the first instance, (the non-methodologist) was thinking about. [Gibbons 1987]

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 productive rhythms 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]

A final observation introduces the notion of implicit definition. ¶ D. Hilbert has worked out Foundations of Geometry that satisfy contemporary logicians. One of his important devices is known as implicit definition. Thus the meaning of both point and straight line is fixed by the relation that two and only two points determine a straight line. ¶ In terms of the foregoing analysis, one may say that implicit definition consists in explanatory definition without nominal definition. It consists in explanatory definition, for the relation that two points determine a straight line is a postulational element such as the equality of all radii in a circle. It omits nominal definition, for one cannot restrict Hilbert’s point to the Euclidean meaning of position without magnitude. An ordered pair of numbers satisfies Hilbert’s implicit definition of a point, for two such pairs determine a straight line. Similarly, a first degree equation satisfies Hilbert’s implicit definition of a straight line, for such an equation is determined by two ordered pair of numbers. ¶ 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 significanceis contained. [CWL 3, 12-13/36-37]

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 nobjects. 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. CWL 10, 154

.12 Search for conjugates which will completely explain the economic process; make precise analytical distinctions upon which a superstructure of relations can be built: e.g. point-to-point vs. point-to-line vs. point to surface correspendence; and velocitous and accelerative functionings such as velocities and accelerations defined by the relations in which they stand interdependently with one another.

Lonergan points out that it is insight which produces a set of concepts related to one another in a coherent manner, and that any functional concept-element is known through its formal functional relation to other functional concepts-elements. Thus it is insight which produces the concepts which systematize the productive order; e.g. point-to-point (basic) and point-to-series (surplus) functionally related to one another in a coherent manner as required for scientific significance. And, from these interdependent elements explaining the functional structure of the productive process, we may derive by mapping and correlating implicitly defined explanatory conjugates of the monetary order. called costs, ordinary surplus income, and pure surplus income.[8]

Macrodynamic theory, like subatomic physics or Newtonian mechanics and later mechanics, is “a set of intelligible relations linking what is implicitly defined by the relations themselves; it is a set of relational forms. Any functional concept-elements in macroeconomics – such as basic income, ordinary surplus income, pure surplus income – are known through the functional relations among all concepts-elements.” In fact, macroeconomic dynamics is a field theory, a set of purely intelligible relations purged of human psychology, proprietary and social relations, and residues of efficient cause, to which human psychology must adapt.

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) which, in the first instance, (the non-methodologist) was thinking about. [Gibbons 1987]

The point-to-line and higher correspondences are based upon the indeterminacy of the relation between certain products and the ultimate products that enter into the standard of living. … The analysis that insists on the indeterminacy is the analysis that insists on the present fact: estimates and expectations are proofs of the present indeterminacy and attempts to get round it; and, to come to the main point, an analysis based on such estimates and expectations can never arrive at a criticism of them; it would move in a vicious circle. It is to avoid that circle that we have divided the process in terms of indeterminate point-to-line and point-to-surface and higher correspondences. [CWL 15, 27-28]

Clearly, then, it is not the arbitrary malice of professors but the interconnected questions and solutions themselves that demand both systematically formed concepts and a technical terminology that corresponds not to any concepts whatsoever but to systematic concepts. [CWL 12, 25]

There are two distinct views of how you, and we mean you, reach understanding: either you puzzle over some given situation and arrive at an understanding that leaves you with what is called a concept, or you somehow pick up concepts as you move through life, or an economic class, and you have to analyze them to make sense of them. The first view we call the MAC view; the second view we call the McA view. The first view, in which the A stands for ah? and ah! is the view of … Lonergan, you and us. The second view is the dominant view, the view of Mankiw, … . It is associated with Scotus (1265-1308) and with the British tradition of Conceptual Analysis. It is a view that murders education. [McShane, 2002-1, 51]

.13 The theory must be normative

The theory will be a normative theory, else the criticism can only be haphazard.

A systematic explanation, then, requires a normative theoretical framework. The basic terms and relations of such a framework would specify the distinctions and correlations that articulate the causes, which are not necessarily visible, of events that are apparent to all. The framework would thus stand to the ordinary apprehension of the booms and slumps of the trade cycle in much the same way that the explanatory grasp of acceleration as the second derivative of a continuous function of distance and time stands to the ordinary, commonsense grasp of what it is to be going faster. [CWL 15, Editors’ Introduction lv]

It is not just the absence of functional distinctions, … It is the entire mentality, the fixity of the descriptive and modeling mentality as opposed to the explanatory and normative perspective at which we aim. [McShane, 2017, 62]

.14 The analysis is an analysis of functional interactions. Discover the full set of relations comprising a normative explanatory theory; seek a complete theory in which all equations cohere with one another to constitute complete explanation – in contrast to a mere congeries of isolated, unrelated insights.

Lonergan’s basic terms are the velocities of interdependent, mutually defining, and mutually constraining functionings.

Again, (Lonergan) approaches the focus armed with precise analytic distinctions upon which a superstructure of laws, coherent with one another and comprising a complete theory, may be constructed. Paraphrasing [CWL 3, 80/103]:

The difficulty here is the absence of the functional classifications, basic and surplus, and the rhythmic ramifications. It is like trying to have a clear view on fire-hazardous chemicals prior to the emergence of the perspectives of Lavoisier and Mendeleev. [McShane, 2017, 87]

Now as the statistical approach differs from the descriptive, the analytic differs from both. Out of endless classificatory possibilities it selects not the one sanctioned by ordinary speech nor again the one sanctioned by facility of measurement but the one that most rapidly yields terms which can be defined by the functional interrelations in which they stand. [CWL 21, 112]

Click for Edifice of Formulae of the Ideal Pure Cycle.

It is not just the absence of functional distinctions, … It is the entire mentality, the fixity of the descriptive and modeling mentality as opposed to the explanatory and normative perspective at which we aim. [McShane, 2017, 62]

Over and over again McShane endeavors to keep the analyst in a proper orientation by insisting that the analysis a) must be functional, b) regards a concrete process, and c) is heuristically oriented towards the discovery of a dynamic theory.

I have insisted on focusing on the central issue: the need of a functional analysis of the productive process and its correlated monetary flow. [McShane 1980,200]

Lonergan’s analysis is concrete but heuristic. It focuses on functional relations intrinsic to the productive process to reach eventually a general theory of dynamic equilibria and disequilibria. [McShane 1980, 117]

The division is not a matter of social relations or of property or of the properties of things: it is a functional analysis. … The aim of the analysis is to reveal the possibilities of the productive process as a dynamic system. One moves forward to that revelation in so far as one appreciates the different ways in which basic and surplus stages may relate. [McShane 1980, 119-20]

The analysis is functional and leads us to define five monetary functions which reveal a set of circulations of money. [McShane 1980, 121]

Now whatever the difficulties of measurement, the functional distinction is undeniably valid. [McShane 1980, 121]

the diagram is an aid to separating and understanding functions. The circles are not places, nor are they, say, groups of capitalists, workers, bankers, exporters. … The diagram represents the functional journeys. [McShane 2017, 79]

you begin to glimpse the necessity and the plausibility of the functional analysis for the understanding and guiding of the globe’s economy. [McShane, 2017, 81]

We stick with our simple illustrations … to get you used to thinking in terms of these functional distinctions. [McShane, 2017, 85]

The difficulty here is the absence of the functional classifications, basic and surplus, and the rhythmic ramifications. It is like trying to have a clear view on fire-hazardous chemicals prior to the emergence of the perspectives of Lavoisier and Mendeleev. [McShane, 2017, 87]

Many will still find it difficult to think functionally. (I hope you do not imagine) in terms of suppliers passing money on to buyers who pass money on to some redistributive area. [McShane, 2017, 88]

“Functional” is for Lonergan a technical term pertaining to the realm of explanation, analysis, theory; Lonergan illustrates his basic meaning of ‘explanation’ by referring to D. Hilbert’s method of implicit definition: … In Lonergan’s circulation analysis, the basic (dynamical) terms are rates (implicitly defined by their functional relations to one another) – rates of mutually conditioning, and interdependent productive activities and rates of mutually conditioning, and interdependent payments. The objective of analysis is to discover the … functional (inter)relationships (which implicitly define these rates and explain the dynamics of these rates to one another). [CWL 15, 26-27 ftnt 27][9]

.15 Seek a field theory of pure relations in order to transcend and sublate the mushy efficient-cause theory of psychological preferences and utility.

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. [CWL 10, 154]

The whole structure is relational: one cannot conceive the terms without the relations nor the relations without the terms. Both terms and relations constitute a basic framework to be filled out, [CWL 3, 492/516] (In addition, read in the entirety CWL 3, 491-6/514-20)

“Functional” is for Lonergan a technical term pertaining to the realm of explanation, analysis, theory; it does not mean “who does what” in come commonsense realm of activity. … Lonergan illustrates his basic meaning of ‘explanation’ by referring to D. Hilbert’s method of implicit definition: 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. ‘Thus the meaning of both point and straight line is fixed by the relation that two and only two points determine a straight line. … Lonergan went on to identify the contemporary notion of a “function” as one of the most basic kinds of explanatory, implicit definition – one that specifies “things in their relations to one another”(CWL 3, 37-38/61-62)…In Lonergan’s circulation analysis, the basic terms are rates – rates of productive activities and rates of payments. The objective of the analysis is to discover the underlying intelligible and dynamic (accelerative) network of functional, mutually conditioning, and interdependent relationships of these rates to one another. [CWL 15, 26-27 ftnt 27]

There is a sense in which one may speak of the fraction of basic outlay that moves to basic income as the “costs” of basic production. It is true that that sense is not at all an accountant’s sense of costs; … But however remote from the accountant’s meaning of the term “costs,” it remains that there is an aggregate and functional sense in which the fraction… is an index of costs. For the greater the fraction that basic income is of total income (or total outlay), the less the remainder which constitutes the aggregate possibility of profit. But what limits profit may be termed costs. Hence we propose ….to speak of (c’O’ = p’a’Q’) and (c”O” = p”a”Q”) as costs of production, having warned the reader that the costs in question are aggregate and functional costs…. [CWL 15, 156-57]

On classical analysis economic mechanism is the pricing system. It coordinates spontaneously a vast and ever shifting manifold of otherwise independent choices of demand and decisions of supply. But man does not stand outside this machine; he is part of it; his choices and decisions are themselves the variables in the system. It follows that there is no possibility of setting down methodically, on the one hand, the exigencies of the machine and, on the other, the consequent performance of man. [CWL 21, 109]

☐Need more on field theory:
Lagange and Hamilton
D’Inverno
L&M
Ian Lawrie

.16 Project the correlations of the productive process onto the field of payments to define classes of payments correlated with analytically prior, interdependent, analytical, explanatory production functionings.

Project the correlations of the productive process onto payments to define classes of payments correlated with the precisely-analytical, distinct production functionings.

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]

Money buys the services of workers and the final products of units of enterprise. Money is a dummy invented by man to serve the process of production and exchange.

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, Editor’s Introduction, xxviii quoting Lonergan]

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 productive rhythms 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]

Lonergan pointed out that this differentiation of economic activities into the production of consumer goods in the standard of living and the production of producer goods that transform the possibilities for future consumer-goods production is discussed by traditional economists such as S. M. Longfield (1802-1884), John Rae (1796-1872), Nassau Senior (1790-1864), Eugen von Bohm-Bawerk (1851-1914), and in the heavily disputed “Ricardo effect.” But Lonergan credits Piero Sraffa (1898-1983) as having clarified it most thoroughly in his famous essay, Production of Commodities by Means of Commodities(1960). Yet even Sraffa does not use his sophisticated explanation of the “Ricardo effect” and the “roundabout” or “concertina”-like phenomena associated with it in the way Lonergan does. [CWL 15,Editors’ Introduction lxii]

.17 Develop a new theory of the velocity of money for practical application to the managing of the money supply.

The quantity of money is correlated with the magnitude of turnovers, and the velocity of money is correlated with the frequencies of turnovers.

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]

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]

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]

Now on the supposition of increasing quantities of money in the circuits due to positive values of (S’-s’O’) and (S”-s”O”), there follows an acceleration of turnover magnitudes proportionate to the magnitude of (S’-s’O’) and (S”-s”O”), and to this may be added any acceleration of turnover frequency that occurs. [CWL 15, 61-3]

This states that with respect to any contemporaneous set of turnovers, j, the aggregate of quantities of money s_ijrequired for transitional basic payments (from entrepreneurs to prior entrepreneurs) is equal to the aggregate of quantities required for initial basic payments r_ijmultiplied by some factor v_i. This factor v_iwill vary in the case of each entrepreneur according to the number of times his contribution to the productive process during one of his turnovers, namely (outlays to employees) r_ij, is found to be(come) the property of some (subsequent) entrepreneur on its way to final sales. Thus, if the ith entrepreneur is a wholesaler with the same turnover as the retailers to whom he sells, v_iis unity. If the wholesaler’s turnover period is twice that of the retailers to whom he sells, v_iis one-half. Universally, entrepreneurs at any instant are carrying some multiple of each r_ij(of prior entrepreneurs in the production series); they are carrying that multiple because they have made transitional payments for it and have not yet recovered their payments; and the aggregate of quantities of money required for transitional payments at any time is equal to the aggregate of quantities required for initial payments multiplied by that elusive multiple v_i. [CWL 21, 169-70]

.18 Understand the microeconomic basis of macroeconomic monetary flows

The foregoing account of circuit acceleration has been based on the diagram of transfers between monetary functions. It has been simply macroeconomic, and so needs to be supplemented with a microeconomic analysis that will clarify certain details of the general picture. [CWL 15 65] See Appendix to Section 15, CWL 15, 65-68, especially (S’-s’O’) = ΔT’ + (O’-R’) + ΔR’

.19 Explain the significance of concomitance to achieve continuity in the circulations of money.

A condition of circuit acceleration was seen … 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 [10] 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]

The Diagram of Rates of Flow exhibits outlays c’O’ plus c”O” becoming incomes I’ for expenditures E’ in the basic circuit. The balance of i’O’ with c”O” is the adjustment of the rate of saving to the requirements of the process.

Need the moral be repeated? There exist two circuits, each with its own final market. The equilibrium of 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. [CWL 15, 175]

See Equilibrium in Endogenous Technological Change

.20 Grasp the concept of dynamic equilibrium and discover the conditions of dynamic equilibrium in a multi-correspondenced system of interdependent flows.

It is easy to discern in the Diagram of Rates of Flow that, given circular movement within the basic and surplus circuits, the crossover dealings of i’O’ and c”O” would have to balance to preserve continuity and dynamic equilibrium. (Be careful not to view the circuits as comprised of either one kind of firm or another; understand movements within and between as purely functional.)

Research Giancoli and others for scientists and engineers:
Sum of forces
Sum of torques
Flows and pressures
Electric current formulae

.21 Understand the principle of how to avoid inflation and deflation; dummy money must be constant in 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]

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]

.22 Grasp how and why long-term expansion is a massive affair.

A surplus expansion calls for saving, and a massive surplus expansion calls for massive saving. In contrast, the basic expansion calls for ever-increasing consumption. So the practical wisdom cherished in the surplus expansion (save and invest) has to give way to a quite different practical wisdom (employ for consumption) in the basic expansion. [CWL 15, 119]

k_n[f’_n(t-a)-B_n] = f”_n-1(t) – A_n-1 [CWL 15, 37]
dI’₌Σ(w_idn_i+ n_idw_i+dn_idw_i)y_i[CWL 15, 134]
d(P’Q’) = d(p’a’Q’) + d(p”a”Q”) [CWL 15, 158]
dΣF_i= dvI” [CWL 15, 150]

Long-term acceleration is a massive affair. (e.g. cotton gin, looms, spinning machines, etc. CWL 15, 22) The complexity of an advanced economy is such that many units of enterprise combine to contribute over long periods of time to bring forth a final consumer good. Thus an expansion of the aggregate of consumer goods does not follow instantly upon the invention of a single capital product.

There are three reasons for expecting a long-term acceleration to be a massive affair. … 1) long term planning … 2) as the increased demand for one (unit) justifies development in a series of productive units, so the increased demand for many justifies development in a series of series of units … 3) There is a third consideration of a more abstract character. The emergence both of new ideas and of the concrete conditions necessary for their practical implementation forms matrices of interdependence: any objective change gives rise to a series of new possibilities and the realization of any of these possibilities has similar consequences; but not all changes are equally pregnant, so that economic history is a succession of time periods in which alternatively the conditions for great change are being slowly accumulated and, later, the great changes them selves are being brought to birth. [CWL 15, 36]

.23 Understand that the interest rate is an internal relation, one aspect among several aspects of a complex but unitary set of relations.

See The Significance of Burley’s and Csapo’s Characteristic Equation and Its Root Solution

.24 Grasp how the process should normatively expand in pure cycles composed of a series of phases.

Our immediate task is to work out the correlations that exist between the velocity and accelerator rhythms of production and the corresponding rhythms of income and expenditure. The set of such correlations constitutes the mechanical structure, a pattern of laws that stand to economic activity as the laws of mechanics to buildings and machines. [CWL 21, 43]

k_n[f’_n(t-a)-B_n] = f”_n-1(t) – A_n-1_{(CWL 15, 37)}

Macroeconomists need to take careful notice of the temporalities; they fail to grasp precisely the implications as to

a) number of levels of production,
b) number of circuits of monetary flows,
c) time lags, and
d) requirement for additional credit money

First, then, there is a wave-like structure that places the accelerated production of producer goods in advance of the consequent acceleration of the production of consumer goods. [CWL 15, 14]

cycles are inherent in the very nature of a long-term acceleration of the productive process. [CWL 15, 36-37]

.25 Grasp the idea of the Redistributive Function as a) containing reserves in the form of negotiable instruments for operative and retirement contingencies, and b) the source of money for allocation to economically justified activities, and c) the expansion of the process.

The economic process of production for exchange is a three-fold process.

The maintaining of a standard of living is attributed to a basic process (distinct process 1), 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 are concentrated in a redistributive function, whence may be derived changes in the stock of money (distinct process 3) dictated by the acceleration (positive or negative) in the basic and surplus stages of the process. … So there is to be discerned a threefold process in which a basic stage is maintained and accelerated by a series of surplus stages, while the needed additions to or subtractions from the stock of money in these processes is derived from the redistributive area. … it will be possible to distinguish stable and unstable combinations and sequences of rates in the three main areas and so gain some insight into the long-standing recurrence of crises in the modern expanding economy. [CWL 15, 53-54]

In the threefold process there are conditioning and conditioned circulations of money.

On such a methodological model (i.e. implicit, explanatory definition replacing nominal definition and accountant’s categories)… classes of payments quickly become rates of payment standing in the mutual conditioning of a circulation; to this mutual and, so to speak, internal (monetary) conditioning there is added the external (monetary) conditioning that arises out of transfers of money from one circulation to another; in turn this twofold conditioning in the monetary order is correlated with the conditioning constituted (in the hierarchical productive order) by productive (and sequential) rhythms of goods and services;[11]and from the foregoing dynamic configuration of conditions during a limited interval of time, there is deduced a catalogue of possible types of change in the configuration over a series of intervals. There results a closely knit frame of reference that can envisage any total movement of an economy as a function of variations in rates of payment, and that can define the conditions of desirable movements as well as deduce the causes of breakdowns. Through such a frame of reference one can see and express the mechanism to which classical precepts are only partially adapted; and through it again one can infer the fuller adaptation that has to be attained. [CWL 21, 111]

Lonergan systematizes the meeting of the monetary order with the productive order. He correlates the temporal, functional interdependencies of the dynamic productive process with the circulations of money required for the continuity and equilibrium of the process.

Lonergan explains banking and credit, trade imbalances, and fiscal mismanagement. Within Lonergan’s Redistributive Function, with its vertical and horizontal transfer arrows out and in, we locate several distinct items and operations which wind up influencing the diagonal operative functional flows: a.) money creation by The Central Bank and the banking system, b.) financing of productive activities through (S’-s’O’) and (S’-s”O”) to supply, c) financing of purchasing through (D’-s’I’) and (D”-s”I”) to demand, d.) management of liquidity balances of individuals, insurance companies, banks, retirement programs and prudent units of enterprise, e.) speculative gambling on stocks, bonds, real estate, and art, f.) a pass-through for government taxes and expenditures, and g.) the financing of foreign trade.

Lonergan makes it perfectly clear to all that the Central Bank and the banking system have the responsibility of a) supplying more and more money as expansion requires, and b) monitoring themselves and their clients to avoid the granting of excess credit. Also, if the banker-producer combination agrees to an interest rate greater than the intrinsic growth rate and the intrinsic macroeconomic interest rate, the effect of the greater difference is to force contractions and layoffs. (in general, excess begets corrective forces by systematic necessity)

Banks are not there to “force their money upon people,” ⁴nor “do they congratulate themselves if they are loaned up.” ⁵ A banking committee is not “an automaton” but understanding and attentive to purpose and situation, “ judging chances of success of each purpose and, as means to this end, the kind of man the borrower is, watching him as he proceeds …”⁶ “It should be observed how important it is for the system of which we are trying to construct a model, that the banker should know, and be able to judge, what his credit is for and that he should be an independent agent. To realize this is to understand what banking means.”⁷ “the banker’s function is essentially a critical, checking, admonitory one. Alike in this respect to economists, bankers are worth their salt only if they make themselves thoroughly unpopular with governments, politicians and the public. This does not matter in times of intact capitalism. In the times of decadent capitalism, this piece of machinery is likely to be put out of gear by legislation.”⁸McShane, Philip (quoting Joseph Schumpeter’s Business Cycles I and II) Implementing Lonergan’s Economics, inThe Lonergan Review, Culture Science and Economics, Vol. III, No 1, Spring 2011, Seton Hall University, pp. 196-204

Thus we define the financial problem as the problem of working out and applying the view that money is public bookkeeping. The grounds for this position may be summarized as follows. … Money is an instrument invented by man to make possible a large and intricate exchange process. 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]

And regarding adherence to a gold standard:

but if the money of account – its title to be called money was indicated in Section 18 (CWL 21, 37-41) – stands side by side with a commodity money (e.g. in a fixed price of exchange for an ounce of gold), then not only are there the undue perturbances of the exchange process from international movements of capital and from financial crises and crashes, but the whole economy comes to be regulated, not by the social good, not by the exigencies of the economy itself, but by the money invented to serve the objective process and the social good. [CWL 21, 104]

.26… Understand the possible bifurcation of purchasing power between the operative circuits and the secondary markets

There can and does occur a bifurcation of purchasing power in the operative circuits vs. the secondary markets. A model of the economy will calculate a value of its representative consumer goods and a value of its representative capital goods. These values will be in some normative ratio of one to the other. The act of flooding the stock and bond markets tends to push stock and bond values above the norm. So, in order to purchase stocks and bonds, one must pay more than the normative amount of money. Thus purchasing power in the stock and bond market has been weakened, while purchasing power in other markets might remain stable. This is a bifurcation of purchasing power and a pathology of money issuance and asset valuation.

.27… Understand that savings are not to be identified as an increase in the money supply

In fact, savings are much more important than is suggested by the equations of savings and investment. “The function of savings is to underpin the (continuation of the) whole redistributional area of the economy. Savings are sums of money that as yet have not been spent. They are built up by (intermediaries such as) savings banks, insurance companies, pension funds. They are mobilized by the agencies that (relend the current savings to firms and to consumers.)” [CWL 15, 70]

McShane quotes Robinson who indicates the theoretical silliness of Friedman’s monetarist doctrine of a constant rate of increase in the money supply.

Then there is Milton Friedman of whom Robinson remarks: “There is an unearthly, mystical element in Friedman’s thought. The mere existence of a stock of money somehow promotes expenditure. [McShane 1980,106]

One cannot identify a reduction of basic income (by savings) with an increase in the supply of money (for investment), – (such a reduction is normally a misdirective drain of the basic circuit, not an increase) – for a reduction of basic income is only one source of such supply; moreover, it is neither the normal nor the principal source of such supply; … principally the increase in the supply of money is due to the expansion of bank credit, which is necessary to provide the positive (S’-s’O’) and (S”-s”O”) needed interval after interval to enable the circuits to keep pace with the expanding productive process. [CWL 15, 142]

.28 Grasp how the pure surplus expansion and its pure surplus income initially play out exponentially.

In a proportionate expansion phase both accelerations are equal and positive. In a surplus expansion phase the acceleration of capital goods exceeds that of consumer goods. In a basic expansion phase the acceleration of consumer goods exceeds that of capital goods. In a stationary economy or static phase, both accelerations equal zero. [?]

once long-term acceleration is underway, rates of production increase increasingly; their graphs are concave upward; but the curvature moves from being flatter to being rounder as the acceleration is generalized from one section (of the capital sector) to another throughout the productive process. During this period of generalization, rates of production are not merely increasing in geometrical progression but moving from less to more rapid geometrical progressions. … This situation, however, is bound to be temporary; its existence is the lag between the generalized long-term acceleration of the surplus stage and that of the basic stage. When that is overcome, dQ’/Q’ moves again to a peak and remains there; and by the same token, dQ”/Q” will begin to decline. [CWL 15, 126]

The foregoing is an outline of perfect adaptation to the pure cycle of the expanding productive process. However, the actual course of events is governed by the actual lack of adaptation to the pure cycle. This lack of adaptation is multiple, and so we treat successively and as distinct though conjoined phenomena the long, drawn-out depression and the short, violent crisis. [CWL 15, 152]

Because the economic process is understood in the form of a field theory, in which all explanatory terms are defined by the functional relations in which they stand with one another in a unitary system – not as isolated, externally-determined absolutes – to understand the phenomenon of the pure surplus expansion is to understand the entire economic process, and, thus, to reach a tightly knit framework for criticism and for governing.

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]

See Pure Surplus Income; Capital Expansion’s Monetary Correlate

And, below is Figure 27-1, the Diagram of the rate of change of the elements of the pure surplus-income ratio. For surrounding context, see (CWL 15, 144-56).

.29 Understand, so as to be able to explain, how the basic expansion and its correlative basic receipts and expenditures should play out; and explain, rather than merely postulate as given, the existence and consequences of the failure to implement the basic expansion.

We must grasp that a lack of basic demand, identified as and verily constituting recession or depression, is explained as insufficiency of c’O’ plus c”O” plus M’ in the Diagram of Rates of Flow – either of consumers not being paid enough, or of basic prices not adjusting downward enough, or of excessive saving rather than spending.

See Why and How the Basic Expansion Fails to be Implemented

In a proportionate expansion phase both accelerations are equal and positive. In a surplus expansion phase the acceleration of capital goods exceeds that of consumer goods. In a basic expansion phase the acceleration of consumer goods exceeds that of capital goods. In a stationary economy or static phase, both accelerations equal zero.

The Industrial Revolution brought forth the precepts of thrift and enterprise; thrift so that money would not be spent at the primary final market but accumulated for the secondary final market; enterprise so that it would not merely be accumulated but also spent by investment. … unless the materialist (basic expansion) phase is guided by the principles of higher and higher wages and is aided by the consumer credits of installment buying, then the materialist (basic expansion) phase remains a mere pipe dream. [CWL 21, 67-68]

… 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 (of these aberrational monetary transfers) is on the 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. But the initial increased transfers to demand [that is, excess transfers along (D’-s’I’) and (D”-s”I”) ] are not simply to besupposed. For that would be postulating without explaining the boom or slump. [CWL 15, 64]

.30 Come to understand that prices and quantities are not external given absolutes constituting the basis of an explanatory theory – as mistakenly conceived in IS-LM, AD-AS, and Phillips Curve schemes.

Prices and quantities are concrete secondary determinations in a non-systematic manifold to be interpreted in the light of the significant variables of the primary relativities of the process. They are boundary conditions of the primary relativities in the light of which the entire economic process is to be explained.

See The Two Components of Concrete Relations

.31 Consider similarities between Einstein’s a) redefinition of space and time by a four-dimensional spatio-temporal tensor in his special theory, and b) general relativity identifying the metric tensor (representing the curvature of space determined by the distribution of matter) with the energy-momentum tensor with Lonergan’s a) definition of pretio-quantital vector-dot-product flows, and b) relativistic identity of costs and revenues.

See The Einsteinian Context

(d’Inverno 1992, 169): Before attempting to solve the field equations we shall consider some of their important physical and mathematical properties in this chapter. The full field equations (in relativistic units) are

G_ab= 8πT_ab

The field equations are differential equations for determining the metric tensor g_abfrom a given energy-momentum tensor T_ab. Here we are reading the equations from right to left. … one specifies a matter distribution (on the left by the energy-momentum tensor on the right) and then solves the equations to ascertain the resulting geometry.
The field equations are equations from which the energy-momentum tensor can be read off corresponding to a given metric tensor g_ab. Here we are reading the equations from left to right.
The field equations consist of ten equations connecting twenty quantities, namely, the ten components of g_aband the ten components of T_ab. Hence, from this point of view, the field equations are to be viewed as constraints on the simultaneous choice of g_aband T_ab. This approach is used when one can partly specify the geometry and the energy-momentum tensor from physical considerations and then the equations are used to try and determine both quantities completely. [d’Inverno, 1992, 169]

Analogously, focusing on one of Lonergan’s implicit equations, the secondary terms of price and quantity are, first, implicitly defined by the relations in which they stand with one another:

If P’Q’ = given k, then P’ and Q’ are mutually determining and mutually constraining in a two-element tensor of the first rank representing a pretio-quantitality. And similarly for (p’), (a’Q’), or (p”), (p”), (a”Q”).

And, if, in P’Q’ = p’a’Q’ + p”a”Q” [CWL 15,156-62], one can specify the basic expenditures tensor (E’ = P’Q’), and partially specify the costs tensor [(p’a’Q’) + (p”a”Q”)], then the equation can be read to specify both tensors completely. We may read from left to right, right to left, or back and forth between right and left.

In implicit equations, the terms are implicitly defined by the relations in which they stand with one another.

P’Q’ = p’a’Q’ + p”a”Q”

We may read from left to right, right to left, or back and forth between right and left. From left to right, expenditures-receipts P’Q’ define and determine concomitant macroeconomic costs, p’a’Q’ and p”a”Q” as they are defined (CWL 15, 156-58) From right to left, basic and surplus costs-outlays constitute the incomes which define and determine what is concomitantly spent for basic products. Travelling back and forth between left and right, the equals sign mandates the reciprocal constraining influence on one another of pretio-quantial expenditures-receipts and pretio-quantital costs-outlays constituting basic incomes.

We may then proceed to define the basic price-spread ratio in terms of accelerations and costs flows and trace its path of expansion and contraction in the expansionary process.

P’/p’ = a’ + a”p”Q”/p’Q’, or
J = a’ + a”R
dJ = da + a”dR +Rda”

.32 Compose for free people plain precepts of adaptation to the requirements of the normative process.

See Practical Precepts for Free People; Consumers, Entrepreneurs, Bankers, Investors

So, is the Fed to be assigned responsibility for controlling the rates of inflation and unemployment, when it itself neither employs the populace, nor creates potential by innovation, nor sets market prices regardless of usage of capacity? Or are units of enterprise in the private sector to be enlightened so as to be responsible for these matters?

The one issue is the locus of that control. Is it to be absolutist from above downwards? Is it to be democratic from below upwards? Plainly it 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 … [T]o deny the possibility of a new science and new precepts is, I am convinced, to deny the possibility of the survival of democracy.[?]

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, lxxi]xPart III: A New Textbook,

Part III.

Lonergan’s Macroeconomic Dynamics: The Science Uniting the Productive Order and the Monetary Order

[11/23/19] A New Macroeconomics Textbook: A macroeconomics textbook may have 700-1000 pages. Usually this would contain a lot of interesting history, a lot of fuzzy psychology, unscientific analysis, and uncertain conclusions. A reader would not gain a clear theory and complete explanation of how the real economic process really works. Those few who are familiar with Functional Macroeconomic Dynamics often yearn for someone to write a 700-page textbook based on Functional Macroeconomic Dynamics, but perhaps modeled in some respects on the conventional textbooks. But is there not a book superior in many respects to a conventional textbook right in our hands? How about this? Reword the subtitle of CWL 15 from An Essay in Circulation Analysis to A Textbook of Circulation Analysis, and have the professor tell the interested student to read the book three times, then report back for discussion about the following:

the canons of empirical method
the technique of implicit definition
functions of scientific and explanatory significance rather than accountants’ unities from the realm of description and common sense
the structure of the rectilinear productive process
money as a dummy invented by man
the perspective of a hierarchical series of monetary circuits
how a monetary circulation meets the production-and-vending process
the primary relativities and concomitance in the Diagram of Rates of Flow
the velocity of money in terms of magnitudes and frequencies
interpretation of prices, quantities, interest rates in the light of significant explanatory variables
the pure cycle and its constituent phases in expansion of the objective economic process
the primary relativities in the expansion of the economic process

The student will learn much that is radically different, explanatory, and very useful; and the student will gain a perspective or framework by which to evaluate and criticize the tenets of conventional textbooks and traditional theories [#59] (Click here for previous “Single Paragraphs”)

Part IV:

Comments Relevant to:

The Federal Reserve’s Current Framework For Monetary Policy: A Review and Assessment,

by Janice C. Eberly, James H. Stock, and Jonathan H Wright

dated June 4-5, 2019

The Federal Reserve Bank is instructed by the Humphrey-Hawkins Act of 1978 to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”

The Fed has quantitative and qualitative monetary tools:

Quantitative tools rendering immediate effects on markets:

Setting the overnight Federal Funds Rate
Open market operations; large scale asset purchases (LSAP) or sales a) to expand or contract the money supply, and b) to adjust, by targeting certain maturities, the slope in regions along the yield curve
Fixing the commercial banks’ reserve ratios

Qualitative tools, intended for transparency a) of the Fed’s thinking regarding the present and future, and b) for immediate effect on expectations regarding interest rates, inflation, and real GDP in the near and longer term:

Communication:
- Forward guidance
  - Summary of Economic Projections
  - Intended or likely future intervention magnitudes
  - Intended or likely future intervention timing

Per the authors: “Our assessment of the performance of Fed policy over the (economic) expansion uses a model of monetary policy, interest rates, the unemployment rate, and price inflation.” P. 24

“The simulation model groups monetary policy actions into two categories: policies that affect the level of the term structure for safe assets and policies that affect its slope.” P.24

(The Fed’s) “policies are nuanced, interact, and have evolved over time. Instead of trying to estimate their effects separately, we quantify the collective effect of this new suite of policies through their combined effect on the slope of the term structure, which in our base model is measured by the spread between the yield on 10-year treasuries and the Fed funds rate.” P. 24

We encourage all to read Eberly, Stock, and Wright. Their essay provides useful information about the Fed’s formerly-narrow historical and broadly-expanded present framework for monetary policy, and about the complex interdependencies and interactions between the productive and monetary orders. The authors are brilliant people working hard to discover and verify economic laws. Extremely impressive is their forthright and honest section “Caveats and Discussion”. (pp. 49-50) However, they have not yet been able to incorporate explanatory Functional Macroeconomic Dynamics into their analysis and must consider doing so as they attempt to help the Fed achieve its goals; so, we point out that implementation of Functional Macroeconomic Dynamics by all theoreticians at and about the Fed and NBER is essential for analysis and complete explanation of the economic process.

Lonergan does not mince words and speaks of FMD as necessary for survivalof freedom and a democratic process.

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 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]

The one issue is the locus of that control. Is it to be absolutist from above downwards? Is it to be democratic from below upwards? Plainly it 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 … [T]o deny the possibility of a new science and new precepts is, I am convinced, to deny the possibility of the survival of democracy.³⁵

To avoid getting ourselves and readers tangled up in the thicket of multiple mutually-conditioning and simultaneously-interacting productive and monetary variables, we have decided mainly to emphasize tenets of Functional Macroeconomic Dynamics, which are general, and thus, universally relevant for monetary policy. We hope to help the reader understand the economic process, of which credit is an essential part, to critique mismanagement of the process by the technicians of money issuance, and to identify the flaws and failings of textbooks, academic papers, and journal articles such as those in Brookings Papers on Economic Activity and National Bureau of Economic Research Working Papers.

At the outset we ask the following questions

Can the authors and others distinguish self-healing of the process from the effect(s) of the Fed’s intervention? (See CWL 15, 155-56)
Can the authors and others distinguish market rates based on pure speculation implied by futures contracts from market rates based on the demand for money of real operations in the operative circuits of invention, production, and exchange?
Does the movement of money strictly within and between the secondary markets for stocks and bonds produce anything real? Does the exchange of titles to ownership of 1,000 or 1,000,000 shares of General Motors produce a single car?Does homeowner Smith’s refinancing of her mortgage-backed loan from future retiree Jones produce a new house?
Could it be that the following

“Some observers of monetary policy as well as some members of the FOMC expressed concerns that the expansion of the balance sheet was setting the stage for a surge in inflation. That this surge never transpired is only known with the benefit of hindsight. Another potential concern was that the size of the balance sheet would make it difficult for the Fed to control short-term interest rates, although in hindsight this fear also was not realized. (p. 49)

is due to the Fed’s massive infusion getting stuck in, and inflating, the secondary markets for stocks and bonds in Lonergan’s Redistributive Function?

Does not the authors’ observation (p. 50) that

much of the slow growth in GDP, given the unemployment rate, stems from factors that have little to do with monetary policy. The decline in the LFPR (labor force productivity rate) is driven in large part by demographic factors, in particular the plateau of women entering the labor force in the 1990s and the subsequent decline of overall labor force participation as the baby boom retires. Although there are open questions about the drivers of the productivity slowdown and the one-third of the decline in the LFPR not explained by demographics, only some of these explanations are cyclical and thus plausibly could be affected by monetary policy. As a result, the scope for alternative monetary policies to effect large improvements in GDP growth rates is significantly circumscribed, even if those policies somehow led to faster declines in the rate of unemployment and thus smaller cyclical movements in TFP growth and the LFPR. (p. 50)

lead to the conclusion that the primary process – prior to and more fundamental than the Fed’s interventions – is the dynamic productive process? (See Why Analyze the Rhythmic Pattern of the Productive Process First?)

Again,

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]

In the same vein, does not the authors’ analysis fail to recognize and account for the several circumstances of inflation mentioned in our treatment of IS-LM, AD-AS models and the Phillips Curve correlation?

**As regards inflation, there can be several possible combinations of rates of flow of money outstripping the rates of flow of what money buys – finished products of units of enterprise and productive services of wage earners:

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 result in a realization of expected 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 stay in the secondary markets for stocks and bonds and inflate prices therein.
Speculative optimism may inflate prices in any and all primary and secondary markets.***

.6 Given that prediction is impossible in the general case and that the conclusions from the counterfactuals are “calibrated to the experience of the current recovery”, how sure can we be that any of the relations garnered by these authors’ and the multitude of authors listed at the end of their essay will hold in the future? What are the probabilities?

The sequence of tenets and comments, with contents identified thematically, is as follows:

.1 Eberly, Stock, and Wright must be admired and thanked. Their knowledge of the nuances of the Fed’s workings is comprehensive, and their econometrics is impressive.

.2 Description or mere postulation, devoid of scientific significance, does not constitute explanation.

.3 Money was invented to serve the economic process, not to rule the primary process of production and exchange.

.4 First, one must analyze the production-and-exchange process to discover its fundamental dynamic structure and its constituent functional interdependencies and interrelations.

.5 The interest rate must be understood as an internal relation among interdependent functionings, not as a magical external lever.

.6 The Central Bank’s main role is to issue the proper amount of money to enable timely production and exchange.

.7 Any analysis must isolate and focus on the self-healing operation of the dynamic production-and-exchange process, so as to distinguish self-healing from fiscal interventions and overrated monetary interventions.

.8 The Fed’s actions are meaningful only if transmitted into the production-and-exchange process.

.9 The responsibility for maintaining full employment and avoiding inflation and deflation is properly assigned to the enlightened private and fiscal sectors,not to the Central Bank.

.10 The goal of science is not prediction. The true aim of science is verification of understanding.

.11 Prediction is impossible in the general case.

.12 Despite the conventional criterion of achieving ever higher earnings per month-quarter-year, there may occur circumstances such that growth is not in the cards and there is little for the finance sector to do.

.13 The interpretations of IS-LM and AS-AD models and the Phillips Curve correlation of inflation and unemployment are unreliable.

.14 The story goes that primitive peoples used to be horrified by the concepts of zero and negative numbers? And the story goes that academics, the Fed, and savers are horrified by the prospects of negative interest rates?

.15 Eberly et al.’s conclusions are listed cryptically below. To do justice to Eberly et al., the reader is requested to access their essay and read it in full and judge for him- or herself.. Our reaction to the conclusions is “Maybe, but what are the real grounds of those conclusions?”

.1 Eberly, Stock, and Wright must be admired and thanked. Their knowledge of the nuances of the Fed’s workings is comprehensive, and their econometrics is impressive.

Eberly, Stock, and Wright must be admired and thanked for their mathematically-virtuous econometric exercise. Their knowledge of the nuances of the Fed’s thinking, language, tools and policies is comprehensive. Correlations, such as theirs are indispensible in analysis, verification, and explanation of the inner relations of the objective economic process. However, the correlations must be correlations which explain and verify the general and abstract propositions which explain the real objective economic process, not correlations of isolated terms which are not adequately explanatory.

… verified correlations necessarily involve the verification of terms implicitly defined by the correlations; … for what is verified accurately is not this or that particular proposition but the general and abstract proposition on which ranges of ranges of particular propositions converge. [CWL 3, 435/460]

Now, at the root of classical method there are two heuristic principles. The first is that similars are understood similarly, that a difference of understanding presupposes a significant difference of data. The second is that similarities, relevant to explanation, lie not in the relations of things to our senses but in their relations to one another. Next, when these heuristic principles are applied, there result classifications by sensible similarity, then correlations, and finally the verification of correlations and of systems of correlations. (Again,) But verified correlations necessarily involve the verification of terms implicitly defined by the correlations; for what is verified accurately is not this or that particular proposition but the general and abstract proposition on which ranges of ranges of particular propositions converge. … there is a fundamental heuristic structure that leads to the determination of conjugates, that is, of terms defined implicitly by their empirically and explanatory relations. Such terms as related are known by understanding, and so they are forms. [CWL 3, 435/460]

.2 Description or mere postulation, devoid of scientific significance, does not constitute explanation.

To give the descriptive characteristics of phenomena such as inflation and unemployment is not to state the immanent intelligibility of inflation and unemployment within a shifting dynamic process. Those must be explained in the light of the significant variables of the explanatory, interdependent, functional flows of the overall functioning process.

For that would be postulating without explaining the boom or slump. [CWL 15, 64]

The distinction between merely asserting vs. carefully explaining is critical for today’s academics teaching at universities, consulting on government councils, or working at the Department of Commerce and the Federal Reserve Board?

There are two ways to talk of equilibrated cycles or of disequilibrated trade cycles colloquially called booms and slumps: The first is simply to describe them in terms of prosperity or misery, i.e. to report a few statistics of long-pase or recent increases or decreases in capital expenditures, employment levels, salary and wage rates, housing prices, debt levels, foreclosures, bankruptcies, whatever. Such merely statistical reporting, lacking a theoretical framework and devoid of theory, is merely to describe the boom or slump, stating and accepting it as something that simply happens without explanation – perhaps surprisingly, by happenstance, mysteriously. As such, and like a postulate (devoid of any explanatory element) in a flawed geometry, the descriptive report contains no theoretical explanation. Absent he framework of a verified theory, we can describe phenomena only in their relation to us as our experience of good times or bad times, without cause, reason, interpretation or explanation in theory.

… 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. But the initial increased transfers to demand [that is, excess transfers along (D’-s’I’) and (D”-s”I”) ] are not simply to be supposed. For that would be postulating without explaining the boom or slump. [CWL 15, 64 in a slight rearrangement]

… 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 (of these aberrational monetary transfers) is on the 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. But the initial increased transfers to demand [that is, excess transfers along (D’-s’I’) and (D”-s”I”) ] are not simply to be supposed. For that would be postulating without explaining the boom or slump. [CWL 15, 64]

.3 Money was invented to serve the economic process, not to rule the primary process of production and exchange.

We repeat that money was invented by man to serve the economic process, not to rule the primary process of production and exchange. Money is not the ultimate master of the situation. Money was invented to conform to the objective exigencies of the economic process, and not vice versa. The wise macroeconomist-detective is careful to “follow the production” rather than “follow the money.”

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]

every product of the exchange economy must mate through exchange with some other product, and the ratio in which the two mate is the exchange value. [CWL 21, 34-35]

If barter is replaced by the divided exchange (made possible by the introduction of money), selling here and buying there, the economic process can attain a vastly greater magnitude and intricacy. [CWL 21, 37-39]

But the divided exchange postulates a dummy that will bridge the intervals, short or long, between contribution to the process and sharing in its products. Further, if this dummy is to work satisfactorily, if it is to bridge the intervals fairly and adequately, then it must fulfill certain conditions. Divisibility…homogeneity… constant in exchange value… universally acceptable… [CWL 21, 37-39]

Conventional macroeconomics has master and slave reversed.

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]

.4 First, one must analyze the production-and-exchange process to discover its fundamental dynamic structure and its constituent functional interdependencies and interrelations.

Money is to buy goods and services offered for sale in a production-and-exchange process which money serves: services of workers in productive activities, and goods and services in final sale activities – such as raw materials, factories, warehousing-and-distribution services, refrigerators, and peanut butter. First, one must analyze the production-and-exchange process to discover its fundamental dynamic structure and its constituent functional interdependencies and interrelations.

Lonergan’s critique employs implicit definition and is thereby purely relational and purely functional. See Lonergan’s Purely Relational and Purely Functional Frame of Reference.

Lonergan’s critique (shows that) by using the technique of implicit definition,

the emphasis shifts from trying to nominally 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 (or the accountants’ aggregates) which, in the first instance, one was thinking about. [Gibbons, Economic Theorizing in Lonergan and Keynes,1987]

The form of the dynamic interdependencies among functional elements of the production-and-exchange process constitutes the primary and explanatory intelligibility underlying the ever-fluctuating rhythms of economic functioning.

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. [Gibbons, Economic Theorizing in Lonergan and Keynes, 1987]

The serious macroeconomist must ask, How did the process evolve to this state? Is the present configuration of explanatory flows equilibrated or disequilibrated? Precisely what policies and actions will correct any distortions? And who is best able to perform these actions?

See Why Analyze the Rhythmic Pattern of the Production Process First?

.5 The interest rate must be understood as an internal relation among interdependent functionings, not as a magical external lever. See The Significance of Burley’s And Csapo’s Characteristic Equation And Its Root Solution. See Interest Rates and Payments.

.6 The Central Bank’s main role is to issue the proper amount of money to enable timely production and exchange.

Though conventional and current-day wisdom assigns responsibility re inflation and unemployment to the Central Bank, the Central Bank neither employs the nation’s entire workforce nor parcels out weekly pay to the entire workforce. It just supplies money to the system and makes sure that the banking system’s issued fiat a) is neither so much or so little as to cause an inflationary boom or a deflationary bust, b) neither encourages fluff projects having poor prospects of sufficient payback, nor strangles the system into contraction, c) doesn’t just get stuck as idle money without productive purpose in the secondary markets for stocks and bonds so as to cause a bifurcation of purchasing power between primary and secondary markets.

See Steven Gjerstad and Vernon L. Smith: From Bubble to Depression.

See Notes Regarding FRB Monetary Policy and a Theoretic of Credit.

Monetary theorists must acknowledge and base their correlations and resultant theory on the functional heart of the process.

The References at the end of Eberly et al.’s essay appear to overlook self-healing and fiscal operations in the real economy and to have a partial bias that leans towards 1) monetary policy actions are the one and only available cause of correction, 2) any monetary action works to effect definite changes, and 3) if no correction is evident in production, employment, prices or rates along the yield curve, then there must be some res ex machina, undetected curvature in economic space, or mysterious counterforce opposing monetary actions. Analysts must not ignore the processes of self-sickening and self-healing, as these processes are explained by FMD.

Unemployment can be explained by Lagrangian and Hamiltionian forms of kinetic plus potential economic energy, with total energy formulated as actual operative flows plus potential flows in an expansion conforming to the laws of the pure cycle. Does any action bring about detrimental or beneficial change or does it amount only to pushing on a rope? Does it influence executive decisions?

Chemistry was bogged down, for centuries, by the obviousness of fire burning, and the obvious conclusion that there was such a reality as phlogiston. Lavoisier offered a discomforting shift from the obviously observed. I am inviting you to a like shift, from the obviousness of the edge of economic process – buying and selling, profit and gross product – to the functional heart of the process. [McShane 2017, 23]

… the productive process was defined as a purely dynamic entity, a movement taking place between the potentialities of nature and products. In the present section, there has been attempted a dynamic division of that entity. Elements in the process are in a point-to-point, or point-to-line, or point-to-surface, or even some higher correspondence with elements in the standard of living. … The division is not based upon proprietary differences, … for the same firm may be engaged at once in different correspondences with the standard of living. Again, it is not a division based upon the properties of things; the same raw materials may be made into consumer goods or capital goods; and the capital goods may be point-to-line or point-to-surface or a higher correspondence; they may have one correspondence at one time and another at another. … the division is, then neither proprietary nor technical. It is a functional division of the structure of the productive process: it reveals the possibilities of the process as a dynamic system, though to bring out the full implications of such a system will require not only the next two sections, on the stages of the process, but also later sections on cycles. [CWL 15, 26-7]

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]

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]

The purpose of this section is to inquire into the manner in which the rate of saving w is adjusted to the phases of the pure cycle of the productive process. Traditional theory looked to shifting[1] 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. [CWL 15, 133]

The maintaining of a standard of living is attributed to a basic process (distinct process 1), 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 are concentrated in a redistributive function, whence may be derived changes in the stock of money (distinct process 3) dictated by the acceleration (positive or negative) in the basic and surplus stages of the process. … So there is to be discerned a threefold process in which a basic stage is maintained and accelerated by a series of surplus stages, while the needed additions to or subtractions from the stock of money in these processes is derived from the redistributive area. … it will be possible to distinguish stable and unstable combinations and sequences of rates in the three main areas and so gain some insight into the long-standing recurrence of crises in the modern expanding economy. [CWL 15, 53-54]

“(the) twofold conditioning in the monetary order is correlated with the conditioning constituted (in the hierarchical productive order) by productive (and sequential) rhythms of goods and services;[2] and from the foregoing dynamic configuration of conditions during a limited interval of time, there is deduced a catalogue of possible types of change in the configuration over a series of intervals.” [CWL 21, 111]

On such a methodological model (i.e. implicit, explanatory definition replacing nominal definition and accountant’s categories)… classes of payments quickly become rates of payment standing in the mutual conditioning of a circulation; to this mutual and, so to speak, internal (monetary) conditioning there is added the external (monetary) conditioning that arises out of transfers of money from one circulation to another; in turn this twofold conditioning in the monetary order is correlated with the conditioning constituted (in the hierarchical productive order) by productive (and sequential) rhythms of goods and services;[3]and from the foregoing dynamic configuration of conditions during a limited interval of time, there is deduced a catalogue of possible types of change in the configuration over a series of intervals. There results a closely knit frame of reference that can envisage any total movement of an economy as a function of variations in rates of payment, and that can define the conditions of desirable movements as well as deduce the causes of breakdowns. Through such a frame of reference one can see and express the mechanism to which classical precepts are only partially adapted; and through it again one can infer the fuller adaptation that has to be attained. [CWL 21, 111]

Finally, provided (D’-s’I’), (D”-s”I”), G vary only slightly from zero, so that their action is absorbed by stocks of goods at the final markets, they exercise a stimulating effect in favor of positive or negative circuit acceleration; otherwise their action pertains either to superimposed circuits of favorable balances of foreign trade and deficit government spending, or else to the cyclic phenomena of booms and slumps. [CWL 15, 64-65]

Lonergan provides the form of self-healing in the monetary order correlated with the productive order as its dummy. The process is ultimately grounded in productive quantities: Q’, Q”, and the rates dQ’/Q’, and dQ”/Q” . and with reference to the Diagram of Rates of Flow:

Diagram of Rates of Flow

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 the 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]

To overlap and continue:

until the position of the strong¹is undermined by the general and prolonged contracting, the requirement²for 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 minimum^3b, any further reduction of the basic stage means that a zero dQ”/Q” is greater than a negative dQ’/Q’; this postulates⁴an 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 equilibrium⁷give 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]

.8 The Fed’s actions are meaningful only if transmitted into the production-and-exchange process.

the supposition that circuit acceleration to some extent postulates increments in the quantity of money in the circuits … points to excess transfers to supply, to (S’-s’O’) and (S”-s”O”), as the mode in which increments in quantities of money enter the circuits. [CWL 15, 61]

Further, the normal entry and exit of quantities of money to the circuits or from them is by the transfers from the redistributive to the supply functions. [CWL 15, 64]

One cannot identify a reduction (through savings) of basic income with an increase in the supply of money (for investment), – (such a reduction is a redirection, not an increase) – for a reduction of basic income is only one source of such supply; moreover, it is neither the normal nor the principal source of such supply; … principally the increase in the supply of money is due to the expansion of bank credit, which is necessary to provide the positive (S’-s’O’) and (S”-s”O”) needed interval after interval to enable the circuits to keep pace with the expanding productive process. [CWL 15 142]

With G 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 (of these aberrational monetary transfers) is on the 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. But the initial increased transfers to demand [that is, excess transfers along (D’-s’I’) and (D”-s”I”) ] are not simply to be supposed. For that would be postulating without explaining the boom or slump. [CWL 15, 64] [20]

.9 The responsibility for maintaining full employment and avoiding inflation and deflation is properly assigned to the enlightened private and fiscal sectors, not to the Central Bank.

See Practical Precepts for Free People – Consumers, Entrepreneurs, Bankers, Investors.

See Why and How the Basic Expansion Fails to be Implemented.

.10 The goal of science is not prediction. The true aim of science is verification of understanding.

Eberly et al. speak of predicting the results– such results as changes in short-term interest rates, changes in GDP, changes in unemployment, changes in slopes along the yield curve, etc. – of combined use of qualitative and quantitative actions.

The true aim of science is verification of understanding.

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]

Moreover, prediction and control in the area of the so-called applied human sciences conflict with the very nature of the subject matter of human science: on the one hand, prediction and control depend upon and imply the policy of elimination of human freedom; on the other, human freedom is something that may just spring up even in situations in which people have managed practically to eliminate it. [CWL 15, Editors’ Introduction, ftnt 32, xxxvii]

Moreover, classical predictions are complemented by statistical predictions. So, the possibility of variation and exception must be acknowledged.

Classical predictions can be exact within assignable limits, because relations between measurements converge on the functional relations that formulate classical laws. But because relative actual frequencies differ at random from probabilities, statistical predictions primarily regard the probabilities of events and only secondarily determine the corresponding frequencies that differ at random from probabilities. Hence, even when numbers are very great and probabilities high, … the possibility of exceptions has to be acknowledged. [CWL 3, 66/88-9]

.11 Prediction is impossible in the general case.

Things are never the same. Any particular constellation of circumstances is certainly different from other superficially similar, but in reality very different, constellations of circumstances in the past. According to Heraclitus, No man ever steps in the same river twice; because both the man and the river have changed.

See Prediction is Impossible in the General Case

.12 Despite the conventional criterion of corporate success – achieving ever higher earnings per month-quarter-year – there may occur circumstances such that growth is not in the cards and there is little for the finance sector to do.

Invention, innovation, and widening have ebbed; units of enterprise can not see opportunity and are not seeking more money to expand; the economic process is just chugging along at a constant velocity. Despite the conventional criterion of successs, i.e. that banks and all other units of enterprise continue to achieve ever higher earnings per month-quarter-year, the possibility of growth is in the aggregate just not there. So, what are the commercial and shadow banks to do?

when profit shifts from being a motive to being a criterion, however, then the inevitable and reasonable tapering off to zero of profits as pure surplus income goes against mistaken expectations. This may induce measures akin to panic on the part of capitalists, who drain the basic circuit in order to keep surplus profits and incomes accelerating – which is one of the ways the pure cycle is transformed into the booms and slumps that economies usually experience. Something like the same mistaken reasoning based on profit as a criterion and not only a motive underpins the reaction of labor unions to the tremendous increases in profits and income in the earlier phases of the surplus expansion (CWL 15, 138) Insofar as their demands for higher wages are out of season, they represent one group’s misguided attempt to claim for itself what is actually the social dividend of a society-wide aggregate. This would be another way of misreading the demands of the pure cycle (CWL 15, 128-129) [CWL15, Editors’ Introduction lxvi]

See Why and How the Basic Expansion Fails to be Implemented.

.13 The interpretations of IS-LM and AS-AD models and the Phillips curve correlation of inflation and unemployment are unreliable.

See The IS-LM, AD-AS models and the Phillips Curve Correlation.

.14 The story goes that primitive peoples used to be horrified by the concepts of zero and negative numbers? And the story goes that, for reason of constraints, academics, the Fed, and savers are horrified by the prospects of negative interest rates?

The meanings of negative interest rates are that one or more of the following are true:

estimated future prospects in the real economy are for losses, perhaps because the Fed and the banking system have not satisfied their obligation to be admonitory and they have lent easy money to finance a plague of excess expansion
thus, there results scant desire to borrow – no matter how low the interest rate – to further expand what is already an excess expansion
there is too much idle money sitting the system without production purpose, perhaps because of quantitative flooding.

Also, anyone who lives in the real world knows that, if persons have enjoyed certain levels of income and wealth for an extended period, they expect to enjoy at least as much forever. It is difficult to suddenly deprive them of it; and, if they are so deprived, they tend to become angry. Thus, if monetary actions artificially prop up activity and prices in primary or secondary markets, it becomes difficult to remove the props so as to restore the productive and monetary system to its natural level. The monetary authority has put itself between a rock and a hard place; it has dug a hole for itself.

.15 Eberly et al.’s six conclusions, which are preceded in their Section 7. Caveats and Conclusions by forthright and honest qualifications of their findings, are listed cryptically below. To do justice to Eberly et al., the reader is requested to access their essay, read it in full, and judge all for him- or herself.. Our reaction to the conclusions is “Maybe, but what are the real grounds in the production-and-exchange process for those conclusions?”

Eberly, Janice C., James H. Stock, Jonathan Wright, The Federal Reserve’s Current Framework for Monetary policy: A Review and Assessment, NBER Working Paper Series, Working Paper 26002. Http://www.nber.org/papers/w26002 [Eberly, Stock, and Wright 2019]

1. Current monetary policy, in particular its new suite of slope policies, played an important role in supporting the recovery.
2. The main forces behind the slow growth of GDP over this recovery are trends that predate the recession.
3. Despite the efficacy of slope policy, the zero lower bound significantly restricted the scope of monetary policy during the recovery.
4. Small changes in the policy stance would have produced small changes in realized outcomes.(plus examples)
5. Of thecounterfactuals considered, the policies with the largest effect are ones with early and aggressive slope policy.
6. The current suite of policies would have led to a substantially faster recovery had the Fed inherited higher nominal interest rates and inflation consistent with a higher inflation target.

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 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]

The one issue is the locus of that control. Is it to be absolutist from above downwards? Is it to be democratic from below upwards? Plainly it 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 … [T]o deny the possibility of a new science and new precepts is, I am convinced, to deny the possibility of the survival of democracy.³⁵

A New Paradigm: Bernard Lonergan's Functional Macroeconomic Dynamics

The Purely Relational Foundations and Derived Superstructure of Macroeconomic Dynamics; An Explanatory Systematics and A New Standard Model of the Objective Economic Process

Fundamental Disorientations at the Federal Reserve Bank and the National Bureau of Economic Research

Part I: The Disorientations of Macroeconomists

k_n[f’_n(t-a)-B_n] = f”_n-1(t) – A_n-1_{(CWL 15, 37)}

Part II: Principles and Precepts of Real Analysis

k_n[f’_n(t-a)-B_n] = f”_n-1(t) – A_n-1_{(CWL 15, 37)}

G_ab= 8πT_ab

Part III.

Lonergan’s Macroeconomic Dynamics: The Science Uniting the Productive Order and the Monetary Order

Part IV:

Comments Relevant to:

The Federal Reserve’s Current Framework For Monetary Policy: A Review and Assessment,

by Janice C. Eberly, James H. Stock, and Jonathan H Wright

Part I: The Disorientations of Macroeconomists

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

Part II: Principles and Precepts of Real Analysis

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

Gab= 8πTab

Part III.

Lonergan’s Macroeconomic Dynamics: The Science Uniting the Productive Order and the Monetary Order

Part IV:

Comments Relevant to:

The Federal Reserve’s Current Framework For Monetary Policy: A Review and Assessment,

by Janice C. Eberly, James H. Stock, and Jonathan H Wright

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k_n[f’_n(t-a)-B_n] = f”_n-1(t) – A_n-1_{(CWL 15, 37)}

k_n[f’_n(t-a)-B_n] = f”_n-1(t) – A_n-1_{(CWL 15, 37)}

G_ab= 8πT_ab