John H. Cochrane’s Article in The Wall Street Journal, Thursday 8/25/2022

The Wall Street Journal of Thursday, 8/25/2022 featured John H. Cochrane’s commentary entitled  “Nobody Knows How Interest Rates Affect Inflation.”  We would say, “In order to understand how interest payments from Smith to Jones should circulate in order to achieve price stability, continuity, equilibrium and realization of the economy’s potential, one must have a unified theory explaining the whole, organic, dynamic, pretio-quantital,economic process.  Then, within that theory one can know How Interest Rates Might Affect Inflation.”  (Click here, and here)  We would also assert that manipulation by the Fed of the rental price of money – the interest cost – can be counterproductive.

Contents

  • .1. Preliminary notes and ideas to keep in mind
  • .2. Introduction – Smith to Jones
  • .3. Interest payments circulate like other payments
  • .4. What the theoretical interest rate is, and what the actual rate should approximate
  • .5. Re. magnitudes and frequencies of flows
  • .6. Traditional theory vs. Macroeconomic Field Theory re the effect of manipulating interest rates
  • .7. The effect of differences between the charged rate and the theoretical rate
  • .8. The Fed’s Inept Manipulation of rates a) by overnight fix, and b) by open market operations
  • .9. Conclusion

.1. Preliminary notes and ideas to keep in mind

Note 1: This entry should be read in conjunction with the following:

Note 2: Ideally,

… the dummy (money) 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] 

Note 3: The effect of higher interest rates on consumers is small.

The ineptitude of the procedure arises not only from its inadequacy to effect a redistribution of income of the magnitude required but also  from its effects upon the demand for money. … The effect of rising interest rates on consumer borrowing will be excellent as far as it goes; for it cannot but reduce consumer borrowing; on the other hand, one may doubt if such reduction is very significant, for an inability to calculate is a normal condition of consumer borrowing, and rising interest rates hardly exert a great influence on people who do not calculate. (CWL 3, 143-44)

The effect of rising interest rates on turnover magnitudes depends upon the turnover frequency of the enterprise.  If the frequency is once every two years, 1% increase in the rate of interest is a 2% increase in costs; if the frequency is once every month, 1% increase in the rate of interest is 1/12 of 1% increase in costs.  Effects of the latter order are negligible when prices are rising.  Indeed, then even a 2% increase might be disregarded; but the combination of the 2% increase in costs with the uncertainty of what prices will be in two years’ time is a rather powerful deterrent. (CWL 3, 143-44)

Note 4: In Burley’s analysis containing a proper money supply, the theoretical interest rate approximates the internal growth rate, the real increase to be shared by lender-investors

The internal rate of growth is a function of improved technical and human productivity.  It is not determined by the vagaries of money sloshing back and forth between equities and bonds in the secondary markets.  An excessive money supply, uncoordinated with the money supply required by the magnitudes and frequencies of product flows, will cause excessively low market interest rates and inflated bond prices. The charged and the bond-market interest rates will often differ from the theoretical proper interest rate.  We have recently witnessed these inflated prices and low market interest rates

One could rework the calculations of this paper replacing the c by s>c, where s-c would correspond to goods and money taken outside our equilibrium relative price and production model via an exogenous interest rate ‘ claimed by the banker-producer combination….Then the endogenous growth and interest rate…falls to

                              r=i={k(k’-d’-1)-s[(k’-d’-1)l+dl’]}/{k+s[(k’-d’-2)+(1+d)l}

This would become negative if c corresponded to the stationary state values of r=i=0.  The relative price and activity vectors would then become

yi=Y[k’-d’-1-i, l’s(1+i)](1=i)H-t

xi=X(k’-d’-1-r, d+r)(1=r)t

This ongoing growth in unemployment would seem important to note in a world of high interest debt problems….it would seem important for analysis to be clear about the growing cost of an ongoing extraction of surpluses when living standards of employed workers are downward rigid.  (Peter Burley and Laszlo Csapo, Money Information in Lonergan-von Neumann Systems, Economic Systems Research, vol. 4, No. 2, 1992 pp.139ff}

Note 5:  An able-bodied person who does not contribute to the “social”-economic process is swindling.  A stay-at-home parent is certainly a contributing worker and is not swindling.

.2. Introduction – Smith to Jones

Lonergan’s functional analysis analyzes methodically and scientifically the interdependencies of constituent explanatory monetary flows, while J. Cochrane’s superficial treatment of the intelligibility of interest rates and interest payments indicates that he suffers from a plight similar to that of Thomas Picketty and Elizabeth Warren. None of these has a “grip” on a normative explanatory theory on which all economists can agree and to which all participants must adapt. To satisfy their responsibility to the public, they need to achieve a scientific understanding; of the dynamics of the economic process of production, finance, and exchange; i.e. these influential three need to get a “grip.”   They mistakenly think that the solution to economic imbalances lies in centralist solutions – such as manipulation of interest rates (Cochrane) and unconstrained inflationary spending (Warren) – rather than in enlightenment of the private and government sectors and in those sectors’ enlightened adaptation to the normative principles and laws of Functional Macroeconomic Dynamics, AKA Macroeconomic Field Theory.

We are at the heart of Piketty’s plight: he has no clue of the needed grip on the grounds of the inequality in history.  So, what else can he offer but a centralist solution, taxation, to history’s drunken careening. (McShane, Philip, Picketty’s Plight, 53)

The academy’s ignorance is the main problem.

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

A normative explanatory theory at an adequate level of abstraction will dispel ignorance and silence much psychopolitical blather.  It will be a normative theory of stable prices, continuity, equilibrium, and a pure cycle of expansion in phases.

In order to cure inflation, academe must provide to the participants an explanation of inflation rather than merely a postulation of inflation.

Now, at a certain moment Smith borrows from Jones; and either may function as an individual or a unit of enterprise.  A fixed amount of money simply changes hands between person A and person B.  This amount of money does not, of itself at this moment, effect production or sale of a single good or service.  In the future, Smith will pay interest to Jones for the service Jones supplies to Smith.  The payments will be of so much per interval; i.e. the payment of interest will be at a “rate of interest.”  Smith’s payback-outflows of principal to Jones are simply transfer payments.  They are recorded as credits to cash and debits to loans payable.  Smith’s outflowing interest payments are recorded as credits to cash and debits to interest expense.  Jones’s inflows of principal are recorded as debits to cash and credits to loans receivable.  Jones’s interest receipts are recorded as debits to cash and credits to interest income.  Again, in each future interval, a fixed amount of money simply changes hands between person A and person B.  These amounts of money do not, of themselves, produce or sell a single good or service..

But will there likely result a change in the future circulations of money constituting the economic process of producing and selling for money? Is Smith, the borrower, borrowing for consumption, short-term inventory investment, repair and maintenance of capital equipment, investment in long-term capital, or gambling? Will Jones, the lender, forego consumption, short-term inventory investment, repair and maintenance of capital equipment, long-term capital investment, or gambling?  That is to ask, By how much will the actions of all the Smiths and Jones’s change the aggregates of basic and surplus monetary flows in the two operative circuits or in the Redistributive Function?

One cannot step into the same river twice.  Each historical and current constellation of flows is unique.  Many magnitudes and frequencies of many functional interrelations combine to comprise the economic process at any particular time.  The combination of currents of the riverflow never stays the same, and it is simple-minded to compare the present with the past based on a superficial comparison of one or two components  – as talk-show and academic macroeconomists are wont to do.  

First, at any point in time the economic process involving competing producers may have a little or a lot of excess productive capacity; i.e. there may be some amount of slack; and, thus, competing entrepreneurs may lack “pricing power.”  Or, operations of most competing units of enterprise may be running on all cylinders, be incurring bigger and bigger backlogs, and, so, entrepreneurs will raise prices to reduce bloated backlogs and match orders to deliverable production; i.e. the scarcity of productive capacity may confer pricing power and result in higher prices.

Second, the overall economic process may undergo a pure cycle of expansion.  The phased expansion may begin in a proportionate-expansion phase wherein slack is being eliminated, advance to a surplus-expansion phase wherein new and better (point-to-line) capital equipment is being installed, then advance to a basic-expansion phase wherein the production of more basic (point-to-point) goods are produced, and then to a new and higher static phase, wherein the process is merely reproducing itself; all phases defined by the comparative rates of surplus acceleration vs. basic acceleration, dQ’/Q’ vs. dQ”/Q”.  (See CWL 15, 114 ff)  So, the effect of accelerating interest payments – whether effected a) in magnitude by new loans, b) mandated by the Central Bank”s manipulation of overnight rates, or c) determined by the supply vs. the demand for the quantity of money supplied or withdrawn by the Fed is embedded in their monetary curculations.

How in this dynamic process will Smith apply the money and what will Jones forego?  And what effect will interest obligations have on rapid, short-term processes vs. long-term processes?

Also, besides the manipulation of the rental cost of money by overnight rates and open-market operations and the subsequent circulations intended to stimulate or rein in the process, there exists another mechanism of adjustment – the price mechanism – to correct imbalances of flows that result from misunderstanding and mismanaging the process.

… , besides the pricing system, there exists another economic mechanism, that relative to this (other) system man is not an internal factor but an external agent, and that the present economic problems are peculiarly baffling because man as external agent has not the systematic guidance he needs to operate successfully the machine he controls. [CWL 21, 109]

Please pause briefly at this point simply to note under Table of Topics on the Home page our previous treatments of the money supply and interest rates:

*Interest Rates and Payments

*Money: Notes on the Nature and Purpose of Money

*Notes Regarding FRB Monetary Policy and a Theoretic of Credit

.3. Interest payments circulate like other payments

J. Cochrane’s focus is on the Fed’s current raising of interest rates to higher rates in order to stem inflation.  How might  higher interest rates cause higher interest payments which circulate so as to reduce inflation? He suggests we “wait and see” what happens, because, on one hand, the neo-classical school says the economic process will adjust itself to get rid of inflation, but, on the other hand, the neo-Keynesian school says the Fed must intervene to reduce demand.  We must “wait and see” who’s right.  In contrast, Lonergan discards serial-snapshot Establishment Macrostatics and performs a functional analysis yielding a set of interdependent functions constituting the whole process.  He discovers the dynamic functional interrelations of the whole organic process.  So, unlike Cochrane’s “Nobody”, he can formulate the circulations of payments – including interest payments – among themselves in the operative circuits.  He understands, formulates, and teaches the field theory of the always current, purely-relational, dynamic economic process of production, finance, and exchange.

“All science begins from particular correlations, but the key discovery is the interdependence of the whole.”

… it will be well at once to draw attention to J.A. Schumpeter’s insistence on the merits of the diagram as a tool. (Schumpeter, History 240-43, on the Cantillon-Quesnay tableau.) … First, there is the tremendous simplification it effects.  From millions of exchanges one advances to precise aggregates, relatively few in number, and hence easy to follow up and handle. … Next come the possibilities of advancing to numerical theory.  In this respect, despite profound differences in their respective achievements, the contemporary work of Leontieff may be viewed as a revival of Francois Quesnay’s tableau economique. Most important is the fact that this procedure was the first to make explicit the concept of economic equilibrium.  All science begins from particular correlations, but the key discovery is the interdependence of the whole. … While it is true that a tableau or diagram cannot establish the uniqueness of a system or rigorously ground its universal relevance, it remains that the diagram (of the interconnections of a few precise aggregates) has compensating features that Quesnay’s system of simultaneous equations may imply but does not manifest. … There is the tremendous simplification (a diagram) effects the aims and limitations of macroeconomics make the use of a diagram particularly helpful, …  For its basic terms are defined by their functional relations.  The maintaining of a standard of living (distinct process 1) is attributed to a basic process, an ongoing sequence of instances of so much every so often.  The maintenance and acceleration (distinct process 2) of this basic process is brought about by a sequence of surplus stages, in which each lower stage is maintained and accelerated by the next higher.  Finally, transactions that do no more than transfer titles to ownership (distinct process 3) are concentrated in a redistributive function, whence may be derived changes in the stock of money dictated by the acceleration (positive or negative) in the basic and surplus stages of the process. … So there is to be discerned a threefold process in which a basic stage is maintained and accelerated by a series of surplus stages, while the needed additions to or subtractions from the stock of money in these processes is derived from the redistributive area. … it will be possible to distinguish stable and unstable combinations and sequences of rates in the three main areas and so gain some insight into the long-standing recurrence of crises in the modern expanding economy. [CWL 15, 53 and 177]

The directions and interdependencies of the monetary flows constituting the closed process are represented graphically by the arrows and junctions in the Diagram of Rates of Flow.  (Also, see the field equations in Field Theory in Physics and Macroeconomics.

The monetary flows in the two operative circuits of production and sale and their crossovers are based upon the structure of the productive process. (CWL 15, 19-45) The analysis is “real analysis,” not the building of an imaginary monetary castle in the air.

… real analysis (is) identifying money with what money buys. … If you want to treat money that doesn’t make a difference, you can have a beautiful liberal monetary theory.  But it doesn’t say the way the thing works. [CWL 21, Editors’ Introduction, xxviii  quoting Lonergan]  (Click here)

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] 

Lonergan’s abstract normative explanatory theory will dispel ignorance, initiate proper management of the economic process, and silence much psychopolitical blather.  It will be a normative theory of price stability, continuity, equilibrium, and a pure cycle of expansion in phases.  It will be “something of a Copernican revolution.”

Expansion consists of an increase of transactions, and so, requires more money in the system.

… it will be best to consider financial operations, that is any exchange in which a sum of money is paid for a sum of money to be received. Now either the two sums of money are equal, or else one is greater than the other.  If the two are equal, the transaction is purely redistributive.  If one is greater than the other, then, generally speaking, the difference is the payment for a service of some specific type; rendering such service is as much a part of current production as rendering any other service, while the payment will be divided up, perhaps among different entrepreneurial units, and commonly the initial payments of wages, salaries, rents, dividends, reserve funds, and so forth.  In other words, financial operations are partly redistributive payments and partly payments for services rendered; thus in banking, payments of principal are redistributive, but payments of interest are operative, with interest paid to the banks as a final operative payment (for their services) and interest paid by the banks to depositors an initial operative payment; again, in insurance the payment of policies is redistributive, but the payment of premiums on policies is partly redistributive and partly operative; it is redistributive to the extent it balances the payment of policies; and it is (a final operative payment) to the extent it pays insurance companies for their services.  (CWL 15, 44-45)

Cochrane states “Nobody Knows … “  Such is true, but it is true, not because one of the schools is right and the other wrong, “Nobody knows”  because neither of the two popular schools has achieved a sound explanatory theory.  Neither interventionist economics nor neoclassical self-adjusting economics provides a satisfactory explanation of the immanent intelligibility of how the real economic process works.  Nobody knows because academe has not yet discovered an explanation at an adequate level of abstraction of the economic interrelations among the abstract correlations yielded by the measurable data of the concrete process.  And consequently, econometricians at the Bureau of Economic Analysis, the National Bureau of Economic Research, The Congressional Budget Office, The U.S. Treasury, and the Federal Reserve Bank, do not know how to select, measure and relate the flows of products and payments so as to explain any “state” of dynamic equilibrium or disequilibrium of the economy.

(See Relativistic Invariant,  Space-Time, Concomitance and Abstraction

.4. What the theoretical interest rate is, and what the actual rate should approximate

*Interest Rates and Payments

.5. Re magnitudes and frequencies of flows

See CWL 15, 56-60, and click here

.6. Traditional Theory vs Macroeconomic Field Theory re the effect of raising interest rates

: … 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)

For continuity and the avoidance of disequilibria constituted by excessive or insufficient demand, the rates of saving for investment vs. spending for consumption and the ratios of basic or surplus income to total income, I’/(I’ + I”), and I”/(I’ + I”), must be continually shifted to accommodate the shifting requirements of the individual phases of the pure cycle of expansion.  And the shift in distributions is to be effected by enlightened private and government operations, not by the Fed’s manipulation.  Congress has burdened the Fed with a responsibility which belongs to the private and government sectors.

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)

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]

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

Though the adequate human adaptation to the demands of the process is a shift of incomes, instead the inadequate strategy of variations of interest rates is “felt” to be the answer.  The Fed is charged by an ignorant Congress to produce a correction with a double-edged, counterproductive tool.

 (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 (intrinsically cyclical) demands of the 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]

Re a) the nuance:  The economic process is nuanced by phases with different requirements of income distribution. The process, as a process, advances, and its requirements for nuanced adjustments in income distribution change.

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 requirements of an expanding productive process are that pure surplus income has to keep increasing in the surplus phase of an expansion, that it has to keep decreasing in the basic phase of the expansion, and that it vanishes when the cost of replacements and maintenance absorbs the whole of surplus. [CWL 15, 140, ftnt. 197]

Re b) the magnitude:

(in a surplus expansion,) it would take enormous interest rates backed by all propaganda techniques at our disposal to effect the negative values of dwi (w here symbolizes the propensity to consume of an income stratum i) that are required interval after interval as the surplus expansion proceeds; what is needed is something in the order of ‘incentives to save’ that is as rapid and as effective as the reduction of purchasing power by rising prices. … [CWL 15,  141-144]

Re c) the lumping together and treating a double edge as a single edge:  Higher interest rates increase savings to a minor extent, but they damp large, long-term investment to a major extent.

The ineptitude of the procedure arises not only from its inadequacy to effect a redistribution of income of the magnitude required  … the effect of raising interest rates to encourage savings (for investment) is not to keep the rate of saving and the productive process in harmony as the expansion continues but simply (and counterproductively) to end the expansion by eliminating (by discouragingly higher charged interest costs) its long-term elements. [CWL 15,  141-144]

In a stationary economy, one without innovation or development, the crossovers balance when allowances are made for seasonal and minor fluctuations.  In that state, the crossovers are, of course, constant.  But in a surge the crossovers vary, and the problem of macrodynamic equilibrium is that the crossovers must remain dynamically balanced.  If they do not remain so, then one circuit is being drained in a way that might seem to benefit the other. EFE 69

Similarly a lowering of interest rates may encourage the expansion of basic industry; but it also will encourage the expansion of well-intentioned but not well-thought-out innovations, the number of bankruptcies, etc.  What is needed is the egalitarian shift in incomes, that will compensate for the previous and shorter anti-egalitarian shift, and will produce the things that people really need and can learn to purchase without the help of self-seeking advertisers.   [CWL 15, 141 ftnt 198]

 (Functional Macroeconomic Dynamics’) account (of the monetary distributions analytically 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 (intrinsically cyclical) demands of the 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]

The ineptitude of the procedure arises not only from its inadequacy to effect a redistribution of income of the magnitude required but also  from its effects upon the demand for money. … The effect of rising interest rates on consumer borrowing will be excellent as far as it goes; for it cannot but reduce consumer borrowing; on the other hand, one may doubt if such reduction is very significant, for an inability to calculate is a normal condition of consumer borrowing, and rising interest rates hardly exert a great influence on people who do not calculate.  The effect of rising interest rates on the demand for surplus products is great: one may say that the initiation of further long-term expansion is blocked; to increase the interest rate from 5% to 6% increases by 10% the annual charge (FTNT.  That is, increases in the annual charge by approximately 10%.  The precise increase would be 8.557% if payments were made monthly; 8.651% if payments were made annually.) upon a piece of capital equipment paid for over 20 years.  Thus rising interest rates end further initiation of long-term expansion; on the other hand, expansion already initiated, especially notably advanced, will continue inasmuch an increased burden of future costs is preferred to the net loss of deserting the new or additional enterprise. The effect of rising interest rates on turnover magnitudes depends upon the turnover frequency of the enterprise.  If the frequency is once every two years, 1% increase in the rate of interest is a 2% increase in costs; if the frequency is once every month, 1% increase in the rate of interest is 1/12 of 1% increase in costs.  Effects of the latter order are negligible when prices are rising.  Indeed, then even a 2% increase might be disregarded; but the combination of the 2% increase in costs with the uncertainty of what prices will be in two years’ time is a rather powerful deterrent.  The effect on turnover magnitudes, accordingly, is great when the turnover frequency is low, but negligible when the frequency is high. … ¶ However, the following conclusions seem justified.  When the rate of saving is insufficient, increasing interest rates effect an adjustment.  This adjustment is not an adjustment of the rate of saving to the productive process but of the productive process to the rate of saving; for small inctrements in interest rates tend to eliminate all long-term elements in the expansion; and such small increments necessarily precede the preposterously large increments needed to effect the required negative values of dwi.  Finally, the adjustment is delayed, and it does not deserve the name of adjustment.  It is delayed because the influence of increasing interest rates on short-term enterprise is small.  It does not deserve the name ‘adjustment’ because its effect is not to keep the rate of saving and the productive process in harmony as the expansion continues but simply to end the expansion by eliminating its long-term elements. (CWL 15, 143-44)

.7. The effect of differences between the charged rate and the theoretical rate

*Interest Rates and Payments

.8. The Fed’s Inept Manipulation of rates a) by overnight fix, and b) by open market operations

Click here

.8. Conclusion

Traditional theory and doctrine are wrong.

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)

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]

Again, the following conclusions seem justified.

When the rate of savings is insufficient, increasing interest rates effect an adjustment.  This adjustment is not an adjustment of the rate of saving to the productive process but of the productive process to the rate of saving … it does not deserve the name adjustment.  It is delayed because the influence of increasing interest rates on short-term enterprise is small.  It does not deserve the name ‘adjustment’ because its effect is not to keep the rate of saving and the productive process in harmony as the expansion continues but simply to end the expansion by eliminating its long-term elements.[CWL 15, 144]

Professional economists have misconceived the interest rate:

 The interest rate is the price of the use of money.  From one point of view the general interest rate equals the general growth rate, that which can be shared among equity investors and secured, fixed-income lenders; and a particular rate will be the rate for a particular combination of duration, reward, and risk,  From whatever point of view and assessment of risk and reward the interest rate is a price.  And, theoretically, manipulation by intervention in the price of money is no more or les sacred or effective than intervention in the price of steel or food.  One particular intervention might be easier to effect and administrate, but any artificial change is an artificial change of one variable which is solidary with all the others in the dynamic process.

Academia, government, journalism, and staff at the U.S. Treasury, the Bureau of Economic Analysis, and the Federal Reserve Bank suffer from a misconception and misunderstanding about the intelligibility of interest rates and about the effectiveness of their manipulation of interest rates.  All fail to understand that economic problems are most often caused by the deformational activities of the ignorant private and fiscal sectors; and that the problems are to be corrected by an enlightened private sector and fiscal sector, not by the Fed.  The private and government sectors must administrate the pace and balance of the dynamic process of which their activities are constituents.  They must understand the norms of the dynamic process, and cooperate and coordinate so as to effect the normative relativities and balances of monetary and productive flows.  And, we must affirm, it is also possible for the Fed to mess things up by relying upon a misconception of the intelligibility of the interest rate and by the ineffectiveness, if not the actual counterproductivity, of artificial manipulations.  And we must also admit, the only reason the Fed is mandated to control inflation and unemployment is that the private and fiscal sectors, who are primarily responsible, fail to control inflation and unemployment themselves in the first place.

The Fed’s only charge should be to monitor the process and to supply the proper amount of money for expeditious transacting, not to push on a rope trying to repair what the private and government sectors have messed up.

Banks are not there to “force their money upon people,”4 nor “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.”8  (McShane, Philip (quoting Joseph Schumpeter’s Business Cycles I and II) Implementing Lonergan’s Economics, in The Lonergan Review, Culture Science and Economics, Vol. III, No 1, Spring 2011, Seton Hall University, pp. 196-204)