Harvard Magazine’s podcast, “Ask a Harvard Professor,” recently featured an interview of professors Doug Elmendorf and Karen Dynan – two good people – under the title Doug Elmendorf and Karen Dynan: How Much Can the Federal Budget and the Deficit Continue to Grow? (Click here for video and print versions of the interview)
For future reference by the reader, we display now Figure 14-1, the familiar Diagram of Rates of Flow; Figure 29-1, Diagram of Superposed Circuits; and Figure 31-1, Diagram of Government Spending and Taxes:
The rates of interdependent, mutually-defining monetary flows represented in the Diagram of Rates of Flow are rates of functionings implicitly-defined by their functional relations to one another. Abstract, explanatory meanings are assigned to conventional descriptive terms. The system is purely dynamic, field-theoretic, and purely relational. The monetary flows are concomitant, with brief circulatory gaps in time covered by credit. The analysis seeks the complete explanation of a system consisting of functional flows within and between two interdependent circuits.
On the one hand, there is the movement of empirical science from description to explanation, from proper domains of data to systems of laws that implicitly define the terms they relate; and at the end of this movement there is the ideal goal that is to be attained when all aspects of data, except the empirical residue, will have their intelligible counterpart in systems of explanatory conjugates and ideal frequencies. [CWl 3, 313/337]
“Functional” is for Lonergan a technical term pertaining to the realm of explanation, analysis, theory; … Lonergan (identified) 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 15, 26-27 ftnt 27]
(Lonergan) approaches the focus armed with precise analytic distinctions between basic and surplus (functional flows, outlays, incomes, etc. [CWL 21, xxvi]
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.” Michael Gibbons, Economic Theorizing in Lonergan and Keynes p313
The set of functional relations is unitary. The whole economic process must eventually be understood in a single sweeping insight explaining the entire system of interdependent functionings.
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]
“Moreover, once initial difficulties are overcome and basic insights are reached, the investigation approaches a supreme moment when all data suddenly fall into a single perspective.” [CWL 3, 47/71]
The superposed circuits in Figure 31-1 represent government sector imbalances superposed upon the normatively balanced monetary flows of the private-and-government combination.
Figure 14-1, the Diagram of Rates of Flow is explanatory.
I have spoken of the analysis revealing channels and bringing to light an undertow. My meaning may become clearer by referring to the distinction sometimes made between general equilibrium (Walras, Wicksell) and partial equilibrium (Marshall). The channels of circulation (of monetary aggregates) replace the overall dominance claimed for general equilibrium theory, but they reveal the condition under which partial equilibrium can exist. … More positively, the channels account for booms and slumps, for inflation and deflation, for changed rates of profit, for the attraction found in a favorable balance of trade, the relief given by deficit spending, and the variant provided by multinational corporations and their opposition to the welfare state. [CWL 15, 17]
The podcast discussion was a broad-ranging statistical description of elements affecting the national debt.
- ratios of annual national deficit and cumulative national debt to GDP,
- short- and long-term low rates of interest and their implications for current fiscal and monetary policy,
- components of federal tax revenues and fiscal expenditures; trends and political challenges as to financing of social benefits, such as Social Security, Medicare, and Medicaid,
- population trends among age groups of the working and the retired,
- trends in who currently bears responsibility for adequate retirement contributions, personal saving behavior, and the probable adequacy of benefits for different income strata,
- the benefit to society of government funding of education and scientific research.
The professors’ cited statistical trends in the accounting components of the national debt. They were not asked to interpret these trends in the light of the significant variables of a normative, explanatory framework. The framework of the discussion was mainly the National Income and Product Accounts, i.e. the Bureau of Economic Analysis’ NIPA, not the explanatory framework of Functional Macroeconomic Dynamics. There was an unpressured discussion of the probability of the worst-case scenario: the possibility that, because of 2008 and recent excessive injections of money not linked to production, the bond markets might not stand for the risk that the U.S. might some day be unable to pay its bills.
Beneath the “superfice” of the NIPA accounting tallies, called Gross Domestic Product, there flow interdependent undercurrents having a natural and systematic exigence for dynamic equilibrium among themselves – a monetary equilibrium which precludes government deficits and preserves the exchange value of the currency.
The structure of the interdependencies and the condition of equilibrium are explained by Functional Macroeconomic Dynamics, a field theory of dynamic continuity and equilibrium. FMD’s Normative Pure Cycle of Expansion stands in contrast and in opposition to the trade cycle of boom and systematically-necessary corrective slump. The pure cycle is a general and universally-relevant conception. It is a normative theory and framework wherein a) flows in a circular conditioning within a circuit keep pace, b) crossovers flows in a crossover conditioning between circuits balance, c) money is supplied to the supply functions by the issuing authorities in proper proportion to the values of the expanded transactions, d) velocities and accelerations of expansionary investments in the surplus expansion are properly constrained, e) the basic expansion is implemented subsequent to the surplus expansion, f) money needed for the operations in the operative circuits or for prudent reserves for catastrophe and retirement is not drained into idleness in the Redistributive Function, f) government receipts and expenditures are balanced so as to avoid inflation which swindles those with cash to enrich those with property or debts, and deflation which swindles those with property or debts to enrich those with cash, and thus f) the full potentials of production and employment are achieved.
Exchange using money is a promise of fair reciprocity. Money is a pledge of trust between people.
the real issue is the value of the dummy (money in divided exchange rather than barter)… The (1) relative value (of money) is its usefulness….the scarcity of the (useful) dummy is attended to by the technicians (The Central Bank and the banking system) of the technical rules governing its issuance. Whether it issues from the printing press or from the credit structure makes no difference. The (2) economic value (of money as a means of exchange) lies in the human effort against scarcity… the (3) exchange value is the ratio or proportion in which are exchanged the different categories of objects for which men strive because they are useful and scarce….It is now necessary to state the necessary and sufficient condition of constancy or variation in the exchange value of the dummy. To this end we compare two flows of the circulation: the real flow of property, goods, and services, and the dummy flow being given and taken in exchange for the real flow….Accordingly, the necessary and sufficient condition of constant value in the dummy lies in its concomitant variation with the real flow….More briefly, if there is concomitance between the two flows, then the proportion in which dummies and goods exchange remains the same. (there is proper constancy of pricing) If there is lack of concomitance, then this proportion changes. (there is a deviation from the constancy of pricing) But exchange value is a proportion. Therefore, the concomitance of the two flows is the condition of constant exchange value. CWL 21, 38-39
… the dummy must be constant in exchange value, so that equal quantities continue to exchange, in the general case, for equal quantities of goods and services. The alternative to constant value in the dummy is the alternative of inflation and deflation. Of these famous twins, inflation swindles those with cash to enrich those with property or debts, while deflation swindles those with property or debts to enrich those with cash; in addition to the swindle each of these twins has his own way of torturing the dynamic flows; deflation gives producers a steady stream of losses; inflation yields a steady stream of gains to give production a drug-like stimulus. [CWL 21, 37-38]
Unwittingly, first out of ignorance and now as necessitated by a pandemic, some nations, including the U.S., are wandering into the ultimate menace to the financial system, the application of unscientific Modern Monetary Theory. (Click here and here) The systematic result of MMT’s unconstrained printing of money, unjustified by corresponding production of goods and services, is rampant inflation in prices for either goods and services for financial assets.
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]
Again, the professors answered well the questions the interviewer asked, but we encourage macroeconomists and interlocutors – at Harvard, in the government, and on financial opinion shows – to kick it up a notch above the disorientation of commonsense statistical reporting and achieve reorientation to a more profound explanation of the theory of dynamic disequilibria; they must study Bernard Lonergan’s Macroeconomic Dynamics: An Essay in Circulation Analysis, especially Sections 26-29, and 31. Those five chapters focus on the theory of normative monetary circulations which avoid disequilibrium while achieving full realization of potentials in the economic process. Sections 29 and 31 in particular introduce a theoretical framework by which to understand concrete trade imbalances, government deficits, and tax dynamics. The issues affecting the fiscal disequilibria of deficits and debt include::
- how to adjust rates of incomes and savings according to the requirements of the series of phases of a normative expansionary cycle,
- the ineffectiveness and ineptitude of the government’s (the Fed’s) manipulating interest rates,
- the responsibility of the private and government sectors, rather than the Fed, to manage continuity and equilibrium for full employment and full realization of potential in a given state of technology, culture, and institutions
- the systematically-normal, second-order acceleration and deceleration of pure surplus income for expansionary investment during an expansionary cycle,
- during the slump following excessive investment, the initial distorted equilibrium and its ultimate correction in the form of contractions and price declines,
- the necessity of implementing the basic expansion by adjusting the ratio of savings to investment,
- how the basic price spread systematically expands and contracts during an expansionary cycle.
Thus, those sections provide technical explanations, the discussion of which was beyond the scope of the interview, but the understanding and appreciation of which are important for professors-advisors-consultants-practioners in the field of macroeconomics. Without a normative theory there is no reliable basis for criticism. Valid and effective criticism is grounded in rules and laws. Without knowledge of the laws of the process, interviews and other discussions just fumble around and criticism can be no more than haphazard. Compare the driver of the automobile driving the auto into a ditch with the participants in the economic process driving the process off course.
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]
Macroeconomics is not a matter primarily of psychology, sociology, or anthropology. The science of macroeconomics is, first of all, a matter of understanding the laws of the mechanism. But if the mechanism of macroeconomics included, in a single piece, the psychology, sociology, and anthropology of its participants, criticism “could be no more than haphazard.” Just as we could not control the development and delivery of electricity without Clerk-Maxwell’s electromagnetic equations, so we cannot properly manage the economic process without the field theory of Functional Macroeconomic Dynamics.
Though the best path to enlightenment for the serious macroeconomist is to leave this website and just hole up and read Lonergan’s CWL 15, including the Editors’ Preface, – three or four times before uttering a single word of praise or criticism – we briefly outline the contents of the recommended sections. But, on second thought, before reading CWL15, one should read CWL 3 to gain an appreciation of the mind he/she is dealing with and to get some sense of how likely, or definite, it is that that mind will bring radically different thinking and discover a new science of macroeconomics.
Section 26, “The Cycle of Basic Income,” treats a) the systematic necessity to adjust the rate of saving to the changing requirements of a cycle, b) the theory of how to adjust the rate of savings, and c) that the adjustment of incomes is prior and more effective than the double-edged monkeying around with the double-edged interest rate. All this implies that the private and government operations self-sicken the operations which they themselves constitute and by hook and crook and blind trial and error self-heal their own operations; and, thus, that credit and blame for the effectiveness or ineffectiveness of lowering or raising interest rates is, for the most part, based upon ignorance of how the process actually works.
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 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]
Dynamic equilibrium in the objective expansionary process is constituted by the balance of intercircuit payments, which balance is constituted by properly adapted rates of saving vs. consuming properly adapted to the phases of the expansionary process.
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. … 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. … However, this fundamental mode of adjustment is complemented by a further mechanism of automatic correction … the movement of price levels … but its operation is conditioned. [CWL 15, 135-37]
Section 27, “The Cycle of Pure Surplus Income,” treats the systematic source, nature, and role of pure surplus income, of which our culture has no sound theory whatever of PSI’s nature, and role.
‘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. It follows that one may legitimately project a division of expenditure into the division of income, and it is in this manner that we arrive at the concept of pure surplus income.’ [CWL 15 144]
The flow of income in a functional analysis requires somewhat more attention: it is the corner of the analysis which holds the key to the sublation … of Keynes’ problems of consumption, savings and investments.[McShane 1980, 120-121]
“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]
Now it is true that our culture cannot be accused of mistaken ideas on pure surplus income as it has been defined in this essay; for on that precise topic it has no ideas whatever. [CWL 15:153]
Pure surplus income is at the nerve center of free economies. [CWL 15:147]
Section 28, “The Cycle of the Aggregate Basic Price Spread,” assigns abstract, explanatory meanings to familiar concrete terms and treats the systematic expansion and contraction of the spreads between basic selling price and basic cost price during a pure cycle of expansion.
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’ and c”O” as costs of production, having warned the reader that the costs in question are aggregate and functional costs…. [CWL 15 156-57]
The question of prices, though first in the IS-LM and AD-AS models, is last in Lonergan’s analysis. Price changes must be interpreted in the light of the significant variables among interdependent, implicitly-defined, concomitant functional flows.
The question of prices, then, last in Lonergan’s analysis of the closed economy, is faced within the developed dynamic perspective.
J = a’ + a”R
A heuristic analysis of dJ/dt over the phases of the an economic expansion reveals cyclic fluctuations on the basic price spread … [McShane, 1980, 127-128]
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; … 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]
Section 29, “Superposed Circuits”, treats the theory of monetary disequilibria, such as trade surpluses or government deficits, which fail to contain the justifying rates of c’O’ = p’a’Q’ and c”O” = p”a”Q. (CWL 15, 157-58)
Section 31, “Deficit Spending and Taxes”, treats taxation in the theoretical framework of the two circuits suffering from a lack of the two flows c’O’ = p’a’Q’ and c”O” = p”a”Q. (CWL 15, 157-58)
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 … what cannot be tolerated, much less sustained, is for one circuit to be drained by the other. That is the essence of dynamic disequilibrium. [CWL 15, 175]
There is nothing as practical as good theory. The lack of implementation of a normative theory of monetary circulations results in misunderstandings, wrong judgments, bad decisions and to lingering inadequate demand, fiscal deficits, and mounting national debt. In the throes of unemployment and inadequate basic incomes, our political system mistakenly places the responsibility for correction on the shoulders of the Fed and the welfare system. Instead of the private-government partnership investing with restraint and effecting the anti-egalitarian and egalitarian shifts in income as the systematics of the current phase demands, the government mistakenly proclaims the solution to be the manipulation of interest rates and the provision of welfare.
The Modern Monetary Theory of printing money without constraints so as to seed unconstrained inflation lurks menacingly.
But it appears to be less evident that a vicious circle of ever more demands for a larger money supply with no increase in real income is inflationary. In any case, there has emerged in fact if not in name the welfare state. [CWL 15, 85]
rentiers are recruited from the ranks of the unemployed. [from memory]
Lonergan recalls his earlier treatment of Misadventures (Chapter 20 in CWL 15, 82-86) and suggests that, unless a correct understanding of how the economy actually functions is reached, the only alternatives become wars, cruel dictators, and a welfare state where the rentiers are recruited from the ranks of the unemployed. That is, an improperly managed economy becomes so deformed that, in the end, the joke is on the unenlightened entrepreneur-producers; rather than they being the recipients of social dividends in an equilibrated system, the recipients are the unemployed collecting dividends in the form of welfare checks.
Now I have been looking at the dynamic structure of the industrial exchange economy…I beg to note that such an analysis has not been tried and found wanting. Rather, to speak with Chesterton, it has been thought hard and not tried. What has been tried is roughly as follows: … 4.) the welfare state with its substitutes for a properly functioning basic phase and with its crumbling foundations in economic science, [CWL 15, 95-96]
Functional Macroeconomic Dynamics is a field theory of dynamic continuity and equilibrium. The Normative Pure Cycle of Expansion stands in contrast and in opposition to the trade cycle of boom and systematically-necessary corrective slump. The pure cycle is an ideal and general conception. It is a normative theory and framework wherein a) flows in a circular conditioning within a circuit keep pace, b) crossovers flows in a crossover conditioning between circuits balance, c) money is supplied to the supply functions by the issuing authorities in proper proportion to the values of the expanded transactions, d) velocities and accelerations of expansionary investments in the surplus expansion are properly constrained, e) the basic expansion is implemented subsequent to the surplus expansion, f) money needed for the operations in the operative circuits or for prudent reserves for catastrophe and retirement is not drained into idleness in the Redistributive Function, f) government receipts and expenditures are balanced so as to avoid inflation which swindles those with cash to enrich those with property or debts, and deflation which swindles those with property or debts to enrich those with cash, and thus f) the full potentials of production and employment are achieved.
University professors have a great obligation.
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 enlightenedself-interest. Instead, Lonergan envisaged a vast and long-term educational effort. He insisted that rational control of the economy ‘can be democratic only in the measure in which economic science succeeds in uttering not counsel to rulers but precepts to mankind, not specific remedies and plans to increase the power of bureaucracies, but universal laws which men themselves administrate in the personal conduct of their lives.’ [CWL 15, Editors’ Introduction, lxxi]