Our main topic is titled Functions, Velocities, and the Achievement of Scientific Economics. In this subsection, The Redistributive Function, we locate the function of supplying money to the basic and surplus operative circuits. It is simply the function of supplying additional money to the banking system for lending to the operative circuits, as required for an expansion of transactions. Inflation aside, the nation has more daily transactions now in the real operative circuits than it had in 1776; thus it requires more money in circulation.
We have placed the money-supplying function in the center-circle Redistributive Function, not in the operative circuits of production and exchange. We note that we may for convenience place several other activities which occur outside the operative circuits under the rubric the Redistributive Function:
- The exchange of title to second-hand goods, including stocks, bonds, and past works of art
- The pass-through of export and import financing
- The management of reserves to assure liquidity by insurance companies, pension funds, future retirees, banks, expanding units of enterprise
To assure liquidity, financial firms, non-financial firms, producing firms, and future homeowners move money among financial assets to manage balances in the redistributive function:
First there are redistributional balances (like) the reserves assuring the liquidity of banks, insurance companies, underwriters, dealers in stocks and bonds, and the accumulations for the purchase of land, used capital equipment, and secondhand products such as houses, used motorcars, and the like. [CWL 21, 58-59]
The activities of the secondhand trade are also placed in the redistributive function:
… there are further sales even after the products have been sold on the final markets. Thus, the stock market redistributes investments, the secondhand trade redistributes liquidated undertakings and durable primary products, and the real estate business redistributes the ownership of land, … Redistributional activity is a function of the rapidity with which owners change their minds. … redistributional activity, though it has its political equivalents in purges, deportations, confiscations, is in itself essentially an exchange phenomenon. [CWL 21, 44]
An expansion of the economy postulates an expansion of transactions. Additional money is needed in the supply function for additional initial payments to workers and transitional payments to suppliers. Normatively, the additional money is created outside the operative circuits by the Central Bank, infused as purchases of financial assets from commercial and other banks by the Central Bank, and ultimately released by these banks into the supply function of the expanding economy:
the supposition that the circuit acceleration to some extent postulates increments in the quantities of money in the circuits accounts both for mercantilism and for the substitution of more elegant techniques in place of mercantilism. Further, it points to excess transfers to supply (S’-s’O’) and (S”-s”O”) as the mode in which increments in quantities of money enter the circuits. [CWL 15, 61]
The effect of excess transfers from the redistributive function to the supply function, of (S’-s’O’) and (S”-s”O”), is twofold. Primarily it is a matter of aggregate increments in monetary circulating capital;… [CWL 15, 61]
in the real order the primary (basic) circuit is accelerated by the secondary (surplus), and in the financial order both primary and secondary circuits are accelerated by redistributional excess releases. [CWL 21, 93]
In contrast to infusion of money into and confined to the supply function for productive expansion, the banking system often is a party to the addition of purely inflationary money into the demand function. Excess inflationary infusions into the demand for basic- or surplus-products purchases are the monetary element in the theory of booms and slumps:
positive or negative transfers to basic demand (D’-s”I’) and consequent similar transfers to surplus demand (D”-s”I”) belong to the theory of booms and slumps. They involve changes in (aggregate basic or aggregate surplus) demand, with entrepreneurs receiving back more (or less) than they paid out in outlay (which includes profits of all kinds). The immediate effect is on the price levels at the final markets, and to these changes (in price), enterprise as a whole responds to release an upward (or downward) movement of the whole economy. But the initial increased transfers to demand [that is, (D’-s’I’) and (D”-s”I”) are not zero] are not simply to be supposed. For that would be postulating without explaining the boom or slump. [CWL 15, 64]
Pause! What is the meaning of the last sentence, “For that would be postulating without explaining the boom or slump”? What is Lonergan getting at? A postulate contains an explanatory relational element upon which a coherent system may be constructed. So, “the initial increased transfers to demand [that is, (D’-s’I’) and (D”-s”I”) are not zero] are not simply to be supposed as an extrinsic element having nothing to do with explanation or theory. Such transfers are explanatory of booms and corrective slumps. They are intrinsic to the theory. They are the very fabric of booms. They are formal elements of the boom and its corrective slump. They are immanent as the formal cause – rather than an exogenous efficient cause – of the boom and corrective slump. They are verily the materials of boom and slump. They are not unwitting and innocent bystanders or victims. They are the boom which systematically necessitates the corrective slump. Excess transfers are the theoretical object to which boom refers. They are IT. They are their own explanation.
Just as “all radii are equal” may be postulational of a circle and virtually contain the superstructure of theorems of trigonometry and much of geometry, so infusions to excess demand are postulational in the understanding of a slump.
As Euclid defined a straight line as a line lying evenly between its extremes, so he might have defined a circle as a perfectly round plane curve. … But in fact Euclid’s definition of the circle does more than reveal the proper use of the name, circle. It includes the affirmation that in any circle all radii are exactly equal; and were that affirmation not included in the definition, then it would have to be added as a a postulate. ¶ To view the same matter from another angle, Euclid did postulate that all right angles are equal. Let us name the sum of two adjacent right angles a straight angle. Then, if all right angles are equal, necessarily all straight angles will be equal. Inversely, if all straight angles are equal, all right angles must be equal. Now if straight lines are really straight, if they never bend in any direction, must not all straight angles be equal Could not the postulate of the equality of straight angles be included in the definition of the straight line, as the postulate of the equality of radii is included in the definition of the circle? ¶ At any rate, there is a difference between nominal and explanatory definitions. … ¶ … Both nominal and explanatory definitions suppose insights. But a nominal definition supposes no more than an insight into the proper use of language. An explanatory definition, on the other hand, supposes a further insight into the objects to which language refers. … (In explanatory definition) one is making assertions about the objects (or processes) which names denote. [CWL 3, 10-11/35-36]
Within the Redistributive Function, and with its transfer arrows out and in, we locate several distinct items and operations which wind up influencing the domestic real operative flows but which, strictly speaking, are all extraneous to the domestic real operative circuits of producing and selling goods and services: a.) money creation by The Central Bank and the banking system, b.) financing of productive activities through (S’-s’O’) and (S’-s”O”) to supply, c) financing of purchasing through (D’-s’I’) and (D”-s”I”) to demand, d.) management of liquidity balances of individuals and firms, e.) speculative gambling on stocks, bonds, and art, f.) a pass-through for government taxes and expenditures, and g.) the financing of foreign trade.