Preliminary note: In this section we are addressing the proper understanding and management of the economic process in normal, non-pandemic times. We affirm that the recent pandemic called for extraordinary measures.
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Unwittingly, first out of ignorance, more recently as necessitated by a pandemic, and most recently out of continuing ignorance, some nations, including the U.S., have wandered into the ultimate menace to the financial system, the spending without constraint blessed and recommended by unscientific. so-called Modern Monetary Theory. (Click here and here) The systematic result of MMT’s unconstrained printing of money, unjustified by corresponding, concomitant production of goods and services, is rampant inflation in prices for a) goods and services and/or b) financial assets.
Modern Monetary Theory is a disaster waiting to happen. In its unchecked extreme of printing money unconstrained by relation to the real flow of goods, and services, it tends toward rampant inflation and torture of the flows of the financial system, so as to bring about a) the severe impairment of the financial system, and b) social chaos. The longer MMT’s unconstrained printing and irresponsible borrowing last, the greater would be the intractability of ultimate problems.
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]
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]
Principles and laws of the economic process, and a critique of Modern Monetary Theory
Outlays and their obverse Incomes are the principle of Expenditures and their obverse Receipts. We refer to the double-circuited, credit-centered Diagram of Rates of Flow and to the Monetary-Field-Theory equations which the Diagram represents. (CWL 15, 45-54) A principle is what is first in an order.
Meaning of “Principle”: that which is first in some order. Thus a point is the principle of a line, ‘one’ is the principle of numeration, a cause is the principle of its effect …(CWL 11, 503)
A principle is that which is first in some order, and principles can be found in many different orders. Thus in various disciplines there is the usual distinction between common principles, founded on the formality of being and common to every science, and proper principles, founded on the grasp of the essence of the object of that discipline and therefore proper only to that particular discipline. (CWL 11, 637)
Outlays-Incomes are first in an order; they have a conceptual and practical “principality” as foundational to Expenditures-Receipts. This utterance, “outlays”, is co-opted by Functional Macroeconomic Dynamics into an abstract explanatory conjugate, and it provides an analytical basis for the circulational flow of Outlays-Incomes-Expenditures-Receipts. Without Outlays rewarding work, nothing is produced, nor are there Incomes for Expenditures for purchase.
A condition of circuit acceleration was seen in section 15 to include the keeping in step of basic outlay, basic income, and basic expenditure, and on the other hand, the keeping in step of surplus outlay, surplus income, and surplus expenditure. Any of these rates may begin to vary independently of the others, and adjustment of the others may lag. But any systematic divergence brings automatic correctives to work. The concomitance of outlay and expenditure follows from the interaction of supply and demand. The concomitance of income with outlay and expenditure is identical with the adjustment of the rate of saving to the requirements of the productive process. [CWL 15, 144]
Outlays-Incomes are foundational constituents in the economic process of production followed by exchange.
Recall that concomitance is an associating, a coupling, a belonging together. Though it is not a strict simultaneity, it regards
- The aspects of normative monetary flows in a circular conditioning of one another within a circuit
- normative monetary flows between circuits being in balance
- monetary and product flows keeping in proper proportion within a circuit to avoid inflation and deflation
- government tax receipts and expenditures keeping pace and balance so as to avoid inflation and deflation
- monetary flows into and out of reserves in the Redistributive Function being in balance
There might occur an actual lag in the normative sequence of the O-I → E-R circulation, but that lag would be covered by credit, whose function is to bridge the gap between payments made and payments received. But Modern Monetary Theory – whether out of ignorance of what constitutes good theory or out of psychopolitical recalcitrance – finds it impossible, and so chokes, to acknowledge Outlays-Incomes as conceptually and practically prior to Expenditures-Receipts. (See Why Macroeconomists Don’t Flock To Functional Macroeconomic Dynamics.)
MMT’s proponents fail to prescind from subjective psychology to grasp objective economic principles.
our inquiry differs radically from traditional economics, in which the ultimate premises are not production and exchange but rather exchange and self-interest, or later, exchange and a vaguely defined psychological situation. Our aim is to prescind from human psychology (so) that, in the first place, we may define the objective situation with which man has to deal, and, in the second place, define the psychological attitude that has to be adopted if man is to deal successfully with economic problems. Thus something of a Copernican revolution is attempted: instead of taking man as he is or as he may be thought to be and from that deducing what economic phenomena are going to be, we take the exchange process in its greatest generality and attempt to deduce the human adaptations necessary for survival. [CWL 21, 42- 43]
They pseudo-scientificallyy posit their, and exclusively their, psychopolitical sentiments as the primary explanatory principle of the economic process. MMT’s proponents, exhibiting a characteristic desperation and a hatred of intelligent opposition to their political feeling, posit unrestrained, politically-satisfying Expenditures-Receipts as primary in the conceptual and practical orders; it has them be “principally prior” to Outlays-Incomes. By replacing the vertical S’ and S” with the D’ and D” arrows in the Diagram of Rates of Flow, MMT changes the sequence of circulation and introduces severe inflation as a practical norm. Monetary Field Theory mandates an unintelligible subordination and dependence of O-I on royal E-R.
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]
Equations (4a) and (3a) are mathematically similar. They then give us a simple model of how all exchange money enters and leaves the system as credit money … . Burley, Evolutionary von Neumann Models, p. 272
MMT has things backward; it ruins and removes the good of order;
it makes the normatively subordinate function the dominant function, and it reduces the normatively dominant functioning to the status of servant. MMT does not grasp the proper role of money in the economic process.
… money has to conform to the objective exigencies of the economic process, and not vice versa. Money is an instrument invented to fulfill a definite task; it is not the ultimate master of the situation. (CWL 21, 101; order of sentences has been reversed)
We affirm an exigence for the government to be responsibly socially conscious in order to achieve maximum potential. For this consideration we treat government deficit and and taxation later. Here and now we recommend Fred Lawrence’s “Money, Institutions, and the Human Good” in [Liddy, 2010]
Men are unequal in ability.and in opportunity. Accordingly, if the productive processes are to yield their maximum of human satisfaction, then it is necessary that the less fortunate be able to demand more than they can supply, while there fortunate supply more than they demand. … only by such generosity can it attain its maximum. (CWL 21, 36)
Against this artificial nemesis humanitarianism revolts. A rigidly egalitarian system belongs to a perfectly egalitarian world; (but) a world in which men are, in fact, unequal must find a different system. What system? If the idealism is sentiment without intelligence, it is as likely as not to mate with the underground cynicism of the revolutionaries to foist upon us a dictatorship of the proletariat in which the proletariat does not dictate, a dictatorship of the Herrenvolk in which the Volk obeys the Fuhrer. But if that idealism can be brought too learn the discipline of logic and of scientific reflection, then it will impose a generalization of the exchange economy. To determine the nature of such a generalization is the aim of this inquiry; but at once this is at least evident. The vast forces of human benevolence can no longer be left to tumble down the Niagara of fine sentiments and noble dreams. They have to be assigned a function and harnessed within the exchange system, for in no other way can that system shake off its fictitious fetters to move consistently towards its maximum. [CWL 21, 36]
The idea of engineering human welfare is repugnant to Lonergan, for ‘managing people is not treating them as persons. To treat them as persons one must know and one must invite them to know.’ Making the survival of democracy possible by ‘effectively augmenting the enlightenment of … enlightened self-interest’ cannot be identified merely with the Enlightenment’s project of steering public opinion from unenlightened to enlightened self-interest. Instead, Lonergan envisaged a vast and long-term educational effort. He insisted that rational control of the economy ‘can be democratic only in the measure in which economic science succeeds in uttering not counsel to rulers but precepts to mankind, not specific remedies and plans to increase the power of bureaucracies, but universal laws which men themselves administrate in the personal conduct of their lives.’ [CWL 15, Editors’ Introduction, lxxi]
MMT must learn the discipline of logic and of scientific reflection, so that it can suggest a generalization of the exchange economy. MMT must not promote violation of the laws of the process.
MMT has income falling out of thin air into purchasers’ hands. And, in MMT’s backward scheme, at the moment of exchange new money is effecting a never-ending game of catch-up. Price stability is doomed by thin-air money chasing goods that have not yet been produced; the sum of old-plus-new money is continually chasing the lesser quantity of goods. Such is intrinsically inflationary. By MMT’s wishful psychopolitical edict, the payments for goods outruns the payments to produce them. Expenditures precede Incomes. Thus, Incomes are always trying to catch up with the inflationary diminution of purchasing power. And as this pattern keeps being repeated interval after interval, the excess mounts until, in the end the situation is intractable. Savers for retirement and vulnerable recipients of fixed incomes are cast to the wayside in MMT’s ritual. Many individuals and organizations of all sorts can’t pay their bills and, through no fault of their own, must declare bankruptcy.
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]
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]
One may object that, by the principle of concomitance, the four aspects of the monetary circulation – Outlays, Incomes, Expenditures, Receipts – are virtually simultaneous. However, in reply, concomitance is not a strict simultaneity; it is a theoretic and explanatory associating comprised of dummy-money-plus-credit associated functionally with production and its eventual sale. A constituent of concomitance is credit, whose purpose is to bridge the gap between payments made and payments received; and concomitance is grounded in the principle of order which places O-I prior to E-R. (See Appendix to Section 15, CWL 15, 65-70) Again, without Outlays rewarding work, nothing is produced, nor are there Incomes for Expenditures for purchase.
We now display 1) the Diagram of Normative Rates of Flow; 2) the Diagram of Superposed Circuits which serves to represent the superposed circuit of deficit government spending; and 3) the Diagram of Government Spending and Taxes which serves to represent basic and surplus superposed circuits which may be political alternatives to one another. Note that, in the superposed circuits, the primacy of the S’ and S” channels has been replaced by a primacy of the D’ and D” channels. For Lonergan’s explanation of these two superposed circuits, see CWL 15, 162-65 and 173-76.
We ask the readers to change for themselves, the primacy of the vertical S’ and S” flows to the fallacious primacy of the D’ and D” flows in the Diagram of Rates of Flow and decide for themselves what are the immediate negative implications of such reversal. Again, note in the Diagrams of Superposed Circuits the absence of the critical c’O’ and c”O” flows which justify incomes so as to prevent unjustified inflation. And note that the circuits are closed by flows into the redistributive function where they create – contrary to MMT’s wishes – solidly endowed rentiers. The reader should be careful to distinguish in the circuits between the conditioning and dependence which are intelligible and the conditioning and dependence which are unintelligible.
MMT’s efficient-causal fundamental postulate is that subjective social need or desirability constitutes the theoretical and explanatory justification of unconstrained Expenditure. It’s not that a nation earns incomes by what it produces, but rather desirability itself produces incomes. In contrast, FMD’s fundamental field-theoretic postulate is that a) production itself constitutes real income, b) production flows have a structure to the exigencies of which flows of money must conform, and c) money is a dummy instrument – not a metal commodity – invented by humans to enable a vast and intricate process of flows of so much or so many goods or services every so often. Thus “we define the financial problem as the problem of working out and applying the view that money is public bookkeeping.” [CWL 21, 104]
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. … (It) remains true that variations in the (transactional) volume, if not to result in inflation or deflation, postulate some variations in the quantity (of money). … [CWL 21, 104]
MMT observes – without any sound theoretical explanation of Why – that sometimes the process slows down and unemployment increases. MMT has no sound explanation of Why in terms of a unitary, solidary process of interconnections of functions keeping pace and balance among themselves. It simply declares that money must be injected to stimulate the process to restore full employment. For MMT the primary goal is full employment. Other goals include healthcare, free education, jobs for all, and housing, admirable goals with which nobody, including FMD, quarrels.
But there are middle-ground considerations (See CWL 21, 34-36) calling for a government which is both socially conscious and intelligent enough to impose their taxes without destroying the incentive to invent, innovate, and implement new and better methods.
The question is What are the scientific norms of relations within the proper process to realize these goals. In its felt omniscience and wisdom MMT determines that everything depends upon MMT’s red wheelbarrow. MMT’s psychopolitics is an absolute. Let as much money as needed be printed to pay for everything. Let there be no consideration of the relation between the quantity of money and the magnitudes and frequencies of producers’ turnovers. Let the fallacious, debunked Phillips Curve rule. Flood the system with money and stick your head in the sand as regards possible negative consequences to the vital financial system. In contrast, for Functional Macroeconomic Dynamics, the focus is on the achievement of the full potential of the process by proper conduct according to the objective laws of the objective, dynamic, economic process; and, systematically, this achievement would be characterized by full employment, financial stability, reduced corruption, greater leisure, and general economic well being.
The economic process has objective laws constituted by interdependent and interlocking constituent functional flowings among themselves. The explanatory theory of the process – called by us Functional Macroeconomic Dynamics (FMD) or Modern Macroeconomic Field Theory (MMFT or MFT) is constituted by an invariant set of relations of normative functional flows among themselves. It prescinds from human psychology. It is objective. It explains. Though involving indeterminacy and the impossibility of precise prediction in a concrete non-systematic manifold, FMD scientifically relates so as to measure the velocitous and accelerative variables of the process so as to manage the normative process well. These field-theoretical laws of the process should be observed and honored by good people as dutifully as criminal laws. Participants must understand and adapt to the laws of its optimal functioning.
This requires, first, knowledge of how the process works. Primary responsibility for the achievement of knowledge rests with academe. Realization of its purpose – the economic well being of all authentic participants – is achieved by enlightened politicians and participants honoring-by-achievement the norms of the process. Enlightenment would include appreciation of the following:
- Mutually conditioning flows in a circuit must keep pace
- Crossover flows between circuits must be balanced.
- The potential rhythmic pace of economic expansion in a series of phases must be achieved
- The flow of goods and money must be proportionate from interval to interval (to avoid the swindles of inflation or deflation)
- The current amount of money in the system must be that amount currently needed for expeditious transacting at the existing level of production
- New money for an expansion must enter the process through the supply function rather than through the demand function
- The acceleration of the process in stages postulates corresponding modifications in the levels of saving vs. consuming in the monetary circulation
The economic process exists in a ordered hierarchy of values in human existence. In the process there are three levels:
- a technology
- an economy
- a political order
In human existence there is a normative scale of values:
- vital values
- social values
- cultural values
- personal values
- religious values
For both Lonergan and Pesch the properly economic goal is the appropriate standard of living, the betterment of the material conditions of human existence. For both, economic activity provides the material substratum for the cultural creations of human ingenuity and aspiration…For the Lonergan of Insight (first published 1957) economic ends fit concretely into an ordered hierarchy: technology, which is the society’s concrete possibility for transforming the potentialities of nature into the standard of living, is subordinate to economy, which is the process for producing and distributing the best possible standard of living; and economy is subordinated to a political order embodying a democratic, free-enterprise economy. If the concretely functioning economy disposes of material and technological resources to mediate the material conditions of human living, the task of politics is to constitute an ethos for disposing of the economy, ‘an ethos that at once subtly and flexibly provides concrete premises and norms for practical decisions.’ At the core of any ethos, according to Lonergan writing in Method in Theology (1972), is a normative scale of values: vital values condition and are subordinate to social values such as a prosperous economy; social values condition and are subordinate to cultural values that give meaning and value to a society’s way of life; these cultural values condition and serve personal values – the freedom and dignity of each human being; and all these values condition and are oriented and fulfilled by religious values relating us directly to divine transcendence. [CWL 15, xxxi-xxxii]
Monetary means “having to do with money.” Monetary Theory constitutes the principles, laws, and thus explanation of how money should be created and how money should circulate.
… money has to conform to the objective exigencies of the economic process, and not vice versa. Money is an instrument invented to fulfill a definite task; it is not the ultimate master of the situation. (CWL 21, 101; order of sentences has been reversed)
Functional Macroeconomic Dynamics is a normative explanatory theory of how dummy money should circulate in the economic channels represented in the Diagram of Rates of Flow.
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]
On such a methodological model (i.e. implicit definition according to functional relation)…Classes of payments quickly become rates of payment standing in the mutual conditioning of a circulation; to this mutual and, so to speak, internal conditioning there is added the external 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 rhythms of goods and services; … 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. … [CWL 21, 111]
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 thinkinginvolved 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]
(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]
Exchange using money rests on a promise of fair reciprocity. Money originates from credit. The word “credit” is derived from the Latin credo, credere – to trust or believe. Money is a pledge of trust between people. MMT’s Inflation and deflation over time would destroy fair reciprocity over time.
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]
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]
See “Why Analyze the Rhythmic Pattern of the Productive Process First”
See “Why and How the Basic Expansion Fails to be Implemented”
A normative scientific framework is required.
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)
Without an explanatory normative framework and an enlightenment of bureaucrats and the participants these stewards of the economy cannot make the necessary distinctions.
Previously I have suggested a lack of adaptation in the free economies to the requirements of the pure cycle. What that lack is can now be stated. It is an inability to distinguish between the significance of a relative and an absolute rise or fall of monetary prices. A relative (i.e. “real”) rise or fall is, indeed, a signal for a relatively increased or reduced production (of one product relative to another). If the product I suffers a greater increment, positive or negative, in price than the product j, then more or less of the product I than of product j is being demanded. As prices are in themselves relative, insofar as they express demand, so also they must be interpreted relatively with regard to expansion and contraction. When the prices both of i and j are falling, and i more than j, it may still be true that the production of both should be increasing, though with production of j increasing more than the production of i. For the fall of prices may be general and absolute, as such it will result not from a change in demand but from a failure in income distribution to adjust the rate of saving to the phase of the productive process; to allow such a general maladjustment to convert a basic expansion into a slump is to cut short the expansive cycle of the productive process because one has confu,concomitantsed real and relative prices with monetary and absolute prices. Inversely, the rising prices of the surplus expansion are not real and relative but only monetary and absolute rising prices; to allow them to stimulate production is to convert the surplus expansion (of the ideal pure cycle) into a (trade cycle of) boom (which must be followed out of systematic necessity by a correlative and devastating slump). This I believe is the fundamental lack of adaptation to the productive cycle that our economies have to overcome. [CWL15, 139-140]
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]