In our everyday, descriptive conversations we speak, often without serious thought, of an overall economic functioning or of a particular economic functioning, such as supply or demand. Usually we speak of a function in the sense of an activity and often in the sense of an activity’s efficient or final causality. “The industry is plagued by its excess production.” Thus, a function(ing) is an activity of human agents, who are the “efficient cause”, and it has a purpose or goal intended as the “final cause”
The functioning is with respect to time, so we think fuzzily of it is at a speed. Also, a particular functional flow of goods or money may be cloudily sensed as a component flow in a system of interdependent components without our precisely distinguishing the flows or specifying the interdependence of the flows. “They mined too much ore.” “There’s no money around.” We are aware that money is the means and medium of the exchange of goods and services; we have a vague idea that there is some sort of duality of the productive and the monetary in the entire process.
But our conversation is in the main descriptive; we do not get into systematic relations of functions to one another. Yet lurking beyond our descriptions and begging for distinction and relation is an intelligible system of functional dependencies and interrelations.
Money keeps circulating and is used over and over again. In a theoretically stable economy with the Central Bank having issued just the right quantity of payments-money for smooth transacting, no additional money would ever be needed. In such a stable economy, the same quantity of money would circulate over and over again.
Entrepreneurs’ monetary outlays to employees as compensation for these employees’ services in the production of goods and services for sale become incomes to these employees. Employees, in turn, direct their incomes to expenditures for the goods and services for sale. These expenditures by people become, therefore, receipts for the entrepreneurs. A single cycle of a series of circular payments is thereby completed. Then the cycle begins again; the entrepreneurs devote their receipts to the outlays of the subsequent period. Thus the same quantity of money moves or circulates over and over again.
A brief exploration … leads to the introduction of the notion of the monetary function. … the circulation of money is … a circular series of (functional) relationships of dependence of some flows of payments on other flows. [CWL 15, 48]
production occurs by means of and in view of payments: expenditures that become receipts, and outlays that become income. Money intended for expenditure performs a demand function; and money intended for outlay performs a supply function. Thus, outlay and expenditure, income and receipts, all function as operative in monetary circulation, because they are each functionally congruent with distinct productive processes. [CWL 15, Editors’ Introduction lix]
The phrase “monetary function” or “monetary functioning” denotes a movement of money. As a movement it is a flow. As a flow it is so much every so often. Therefore it is a velocity, whose general characterization is ds/dt or Δs/Δt.
We may identify particular monetary flows by their correlation with particular types of products, such as consumer products, repair and maintenance products, and expansionary capital products.
The functional flow of products involves outlays of money to employees; outlays to employees are a functional movement of money in concert with the production of goods. This monetary flow has two aspects: 1.) the aspect of an outlay for the entrepreneur, and b.) the aspect of income to the employee.
Likewise, the demand for goods and services is the purposive activity of marshaling incomes to effect a purchase of goods and services. This trading function involves a functional flow of goods and a functional flowing of money. The exchange of money for final products has two functional aspects: a.) the aspect of monetary expenditure by the employee-consumer and, b.) the aspect of a monetary receipt to the outlayer-entrepreneur.
Again, as a functional flow of so much per period it is a velocitous functioning. As money it is a velocitous monetary functioning. As payment effecting and constituting supply or demand it is monetary supply or demand.
Thus, in our thinking somewhere between description and explanation, we observe that an economy functions successfully to the extent that the means of exchange is present to effect the exchanges. Since the rhythmic surges of production exhibit velocities, accelerations, maxima and minima, the correlative flows of exchange money would exhibit concomitant velocities, accelerations, maxima and minima. The means of exchange must flow in concomitance with the flow of goods and services. If there is either not-enough money to spend or too much money is spent, the production and sale are either disrupted, distorted, not completed, or carried to excess, i.e. the normative natural rhythms of production and sale are either not reached or overdone, and the proper continuity of the natural potential of the exchange economy is not effected.
This is all casual observation and common knowledge. There are product flows and correlative money flows. But what are the explanatory functional relations of an economy which surges and flattens out? We seek “a clear and precise understanding of the mechanism.”
The facts of the macroeconomy are already well known. What is lacking is a clear and precise understanding of the mechanism behind such obvious facts as the relations between expansion and contraction of the economy, employment and unemployment, inflation and deflation, and many other things that are just common knowledge. [CWL 15, 2]