Rates (Velocities) as Basic Terms

Our main topic is Functions, Velocities, and the Achievement of Scientific Macroeconomics.  this subtopic is Rates (Velocities) as Basic Terms.

The economic process is always the current, purely dynamic process.  And it is intrinsically a process of values.

This process is composed of instances of so many products and so much money every so often.”  It is composed of functional flows.  Flows are velocities.  The process is dynamic.

The material structure of the basic rhythm is quite familiar.  It consists in the series of production factors.  Leather comes from the cattle farm to market.  Dealers collect and redistribute the hides to tanners.  The tanners pass them on to shoemakers, who transfer them, as shoes, through wholesalers and retailers to consumers.  Each factor in this series is an economic rhythm, a set of routine performances, yielding so much every so often.  But all the factors have to combine to give the ultimate product, so many pairs of shoes every so often. … Much more significant than this material structure of the basic rhythm is its dynamic structure.  The latter consists in a number of different levels of production series: the series on the lowest level have a volume of flow that is proportionate to the volume of ultimate products; but the series on the next level have a volume that is proportionate to the acceleration of the lowest level; the series on the third level have a volume proportionate to the acceleration of the accelerator of the lowest and so forth.. CWL 21, 14

The economic process is constituted by interrelated functional activities performed at rates.  There are rates of application of labor and management, and there are rates of compensating payments to human laborers and managers.  The services of workers are flows; additions towards the completion of products are flows; completed products flow: and payment money flows.  Flows are at rates of so much every so often. Thus, the basic terms of explanation of a process of interrelated functional flows must be the rates of the application of constituent interrelated productive functionings and the roles of correlated monetary functionings.

The heuristic employed as guide and method by the investigator of the dynamic process must be a scientific, dynamic heuristic leading him to a dynamic explanation, for the economic process is a dynamic process.  The investigator must explain the process in terms that relate interrelated, interdependent, mutually defining, velocitous functional flows.

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. CWL 15, 179

In the exchange economy, products are produced to be sold.  And money exists to buy products, i.e. the goods and services supplied by the productive process, Lonergan’s treatment considers first, the structure and timing of the primal productive process, second, the structure and timing of the payments correlated with that process, and third, the magnitude and timing of the adjustment of the money supply required by the process.

In the rectilinear production of a product from the potentialities of nature throught to a completed product, the completed product, qiis composed of the factors of production, ki.  These factors are applied at rates by compensated workers in units of enterprise, ji.

qi= ΣΣqijk[1]

But if the ultimate product qis related by a double summation to the contributions of factors of production qijk, then the total flow of ultimate products Qis also related by a double summation to the rates of the contributions of the factors of production Qijkwhere both Qand Qijk are instances of the form‘ so much or so many every so often.’

The application of factors of production at rates is performed by humans who are compensated at rates.  So, as fundamental elements, outlays at rates by units of enterprise producing products at rates provide incomes at rates for purchases of products at rates.

There exists “a circular series of relationships of dependence of some flows of payments on other flows.”  There is a “circle” of outlays becoming incomes becoming expenditures becoming receipts to become outlays in the next round.

A brief exploration of this complexity leads to the introduction of the notion of the monetary function.  Thus the argument takes a further step towards defining a circulation of money……..not a rotational movement…….Rather a circular series of relationships of dependence of some flows of payments on other flows.  Money moves only at the instant of payment or transfer. Most of the time it is quiescent. … it may also be dynamically quiescent, and then it is held in reserve for some definite purpose. … Money held in reserve for a defined purpose will be said to be in a monetary function.  Five such functions are distinguished: (four in the operative cirtcuits) basic demand, basic supply, surplus demand, surplus supply, and a fifth redistributive function. [CWL 15,  48]

Further, since the velocitous monetary functionings are in a) an intracircuit circular, serial dependence and b) an intercircuit crossover dependence, the intelligibility of the circulatory monetary process will be the relations of the functional rates to one another according to all their relations of circular and crossover interdependence.  The immanent intelligibility of the process is an intelligibility of interdependent flow rates.

Analysis yields normative laws for the circulation of money. Note our subtitle: An Essay in Circulation Analysis.

The flow rates of money must satisfy the quantity requirements and the frequency requirements constituting the flow rates of products in the productive process.

The economic process is intrinsically a process of value.  Production at rates and sale at rates “occurs (at rates) by means of and in view of payments (at rates).”

But if economic activity is aimed at the standard of living, in an exchange economy 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]

Again, the process is a process of rates, and the basic terms of explanation are rates.

In Lonergan’s circulation analysis, the basic terms are rates– rates of productive activities and rates of payments.  The objective of the analysis is to discover the underlying intelligible and dynamic (accelerative) network of functional, mutually conditioning, and interdependent relationships of these rates to one another.  [CWL 15 26-27  ftnt 27]

Payments flows are functionally congruent with distinct productive flows.  Both product flows and payments flows have a quantity aspect and a frequency aspect.

the quantity alternativein the rates of payment is conjoined with the quantity alternative in the rate of production, and the frequency alternative in the rate of payment is conjoined with the frequency alternative in the rate of production.  The two cases of quantity-velocity are not only parallel but also correlated. [CWL 15, 57]

Taking a cue from the science of fluid flows, hydrodynamics, we wish to explain a system of flows by a science of flows.  There will be mathematics.

In our analysis of the economic process of value, we must ask ourselves, “What is real analysis?” “What is the way that money really does its work?”  And on the other hand and to perform a reality check, we must ask ourselves, “What is unreal analysis that leads to unreal monetary theory?”  “What monetary theorizing  is just construction of an algebraically virtuous mathematical castle in the air, a form or structure representing and isomorphic with nothing in the real economy?”

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, xxviii (quoting Lonergan) ]




[1]  CWL 15, 30