The Single Circuit is Replaced by the Credit-Centered Double Circuit
Lonergan replaced the single circuit of the textbooks with the credit-centered, double circuit of Functional Macroeconomic Dynamics.
The entire tradition slipped past Lonergan’s simple move. I describe the move as paralleling Newton’s move. Newton started within an old culture of two flows: an earthly flow and, to recall ancient searchings, a quintessential flow. Newton went from two to one. Lonergan started with a dominant one-flow economic analysis – think in terms of the household-firm diagram – and separated it into two flows “to form a more basic concept and develop a more general theory.” 21 [McShane 2017, viii]; also see [CWL 21, 11]
The threefold economic process is represented by the Diagram of Rates of Flow.[1]
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. explanatory definition and implicit definition superseding nominal definition)… classes of payments quickly become rates of payment standing in the mutual conditioning of a circulation; to this mutual and, so to speak, internal (monetary) conditioning there is added the external (monetary) conditioning that arises out of transfers of money from one circulation to another; in turn this twofold conditioning in the monetary order is correlated with the conditioning constituted (in the hierarchical productive order) by productive (and sequential) rhythms of goods and services;[2]and from the foregoing dynamic configuration of conditions during a limited interval of time, there is deduced a catalogue of possible types of change in the configuration over a series of intervals. There results a closely knit frame of reference that can envisage any total movement of an economy as a function of variations in rates of payment, and that can define the conditions of desirable movements as well as deduce the causes of breakdowns. Through such a frame of reference one can see and express the mechanism to which classical precepts are only partially adapted; and through it again one can infer the fuller adaptation that has to be attained. [CWL 21, 111]
The terms and relations of functional macroeconomic dynamics are markedly different from the terms of ordinary business parlance and from the terms of neoclassical and Keynesian economic theory. The explanatory relations of the interdependent functional flows are represented by the Diagram. Also the Diagram is heuristic; it is a brilliant aid to understanding.
Lonergan held the diagram to have both explanatory and heuristic significance. First, then, the later versions of the Essay in Circulation Analysis text draw ever-greater attention to the fact that Lonergan was seeking the explanatory intelligibility underlying the ever-fluctuating rhythms of economic functioning. To that end he worked out a set of terms and relations that ‘implicitly defined’ that intelligible pattern. When all was said and done the relations, and the terms they implicitly defined, were markedly different from either the terms of ordinary business parlance or the terms of neoclassical and Keynesian economic theory. … So, for example, the existence and manner of dynamic mutual interdependence of the two circuits of payment, basic and surplus, is not adequately expressed either by descriptive terms (since this pattern does not directly relate to the senses of anyone operating in a common-sense way in a concretely functioning economy) nor by the series of (simultaneous) equations that do not explicitly manifest the interchanging of ‘flows.’ [CWL 15, 179]
The equilibrium of the economic process is conditioned by the balance of the two circuits. G = c”O” – i’O’ = 0[3] is the condition of equilibrium
It is a common saying that savings equals investment. On the present showing it would be more accurate to say that the crossovers should balance, that a sustained lack of balance portends ruin, … [CWL 15, 70]
The summing up.
Need the moral be repeated? There exist two distinct circuits, each with its own final market. The equilibrium of the economic process is conditioned by the balance of the two circuits: each must be allowed the possibility of continuity, of basic outlay yielding an equal basic income and surplus outlay yielding an equal surplus income, of basic and surplus income yielding equal basic and surplus expenditure, and of these grounding equivalent basic and surplus outlay. But what cannot be tolerated, much less sustained, is for one circuit to be drained by the other. [CWL 15, 175]
But the real present difficulty is making the new start, and the central block to that start is the locked-in silly introductions to economics (as a single-circuit process.) … It is as simple as the shift from the vague standard (single-circuit) diagram to the five-zone diagram presented in this book. [McShane 2017, xi]
[2]… In figure 14-1 the reader will notice five circles representing the monetary functions. … I would add that the aims and limitations of macroeconomics (that is, the macroeconomic circulations presented here) make the use of a diagram particularly helpful, … For its basic terms are defined by their functional relations. The maintaining of a standard of livingis attributed to a basic process(distinct process 1), an ongoing sequence of instances of so much every so often. The maintenanceand acceleration(positive or negative) (distinct process 2) of this basic process is brought about by a sequence of surplus stages, in which each lower stageis maintained and accelerated by the next higher. Finally, transactions that do no more than transfer titles to ownership are concentrated in a redistributivefunction, whence may be derived changes (distinct process 3) 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, 53-54