Investment Money; Its Source and Circulation

There exists a real – but not fully appreciated – pure surplus circuit constituted by the circulation of the monetary correlates of investment.

The sources of pure surplus income for investment are personal savings, retained income from operations, andcredit.  Pure surplus outlays are concomitant with their source.  Pure surplus outlays circulate with pure surplus incomes, to pure surplus expenditures, back to pure surplus receipts.  Sources are conjoined or concomitant as to the pure theory of scientific macroeconomics, and prior and conditional as to use. The occurrence of the prior functional flow is the condition of the occurrence of the next functional flow.  This flow is internal to a circuit or, rather, constitutes the circulation of the circuit.


Please not on the Diagram of rates of Flow above the channels to and from Surplus Outlay O”.


Pure surplus income is the monetary correlate of the production and installation of additional capital equipment for the widening or deepening of point-to-line material and human capital. In a static, no-growth economy, pure surplus incomme is zero; but in a surplus expansion it is positive.  One doesn’t have income  – whether saved or borrowed  –  to invest on expansionary machines in the surplus circuit if one spends all one’s income for consumption of peanut butter, cold cuts, clothing, smartphones, and entertainment. As income circulating interval after interval correlative to expansion in the surplus circuit, pure surplus income is, thus, circulating among investors as a group to the extent needed for reinvestment in each subsequent expansionary period in whatever expansionary investments remain beneficial.  This always-current circulatory returning to the investors-group of current aggregate sums of investment monies, pure surplus income, constitutes and is scientifically explained as a macrodynamic rate of return– as conceptually distinct from the bookkeeper’s merely descriptive rate of “profit” or “net cash flow” on previous investment. One is an aggregate current velocity (i.e. quantitative rate with respect to time); the other is a ratio of the current period’s cash flow attributable to an historic investment.[1]

In Functional Macroeconomic Dynamics, the corporate financial analyst’s ROI is of negligible interest (to us, though not to that analyst). Our interest is in the concomitance and equilibrium of aggregate current functional flows of money within and between the circuits constituting the whole, organic, dynamic economic process.  Our inquiry is a general inquiry proceeding on a more general plane to terminate in a more general macroeconomic conclusion.

… pure surplus income is at the nerve center of free economies. (CWL 15, 147)

As will be discussed, the pure surplus income of an identifiable expansion will rise and – exhausted as to need or benefit – fall.

To visualize this cycle, let us say that F P. 150

In contrast, in this website’s ideal logistic-growth model,


The accumulation (total capital stock P”, not to be confused with Lonergan’s RATE OF PRODUCTION, Q”, and acceleration dQ”/dt)) of capital has the general shape of “Logistic Growth’s” S-curve; the instantaneous velocity (dP/dt) of the accumulation begins, accelerates (i.e.  d2P/dt2), peaks, decelerates, and returns to zero as the accumulation approaches the maximum-carryable asymptote representing the maximum carryable capacity; the function for the total new stock is convex, reaches an inflection point, turns concave and finally approximates the asymptote.

Unless one has a clear understanding of the interrelation of RATE of pure-surplus income vI” and of the ratio of the rate of pure surplus income to total income vI”/(I’ + I”) and of the ratio of the rate of pure surplus production to total production vQ”/(Q’ + Q”), pure surplus income’s ideal trajectory within a model, such as  our ideal logistic-growth model or Lonergan’s ideal pure cycle, cannot be understood.  And, to not understand is, perhaps, to become by default the Great Extrapolator and, unwittingly, the Great Pretender.

Now it is true that our culture cannot be accused of mistaken ideas on pure surplus income as it has been defined in this essay; for on that precise topic it has no ideas whatever. [CWL 15:153]

This pure surplus income (vI”) is quite an interesting object.  When v is greater than zero, it is a rate of income over and above all current requirements for the standard of living, since that is provided by I’, and as well over and above all real maintenance and replacement expenditure, since that is provided by (1-v)I”.  Thus one may identify (current) pure surplus income as the aggregate rate of (current) return upon (current) capital investment: [CWL 15, 146]

And, lo and behold, since it is one of the explanatory conjugates of the functionings constituting the organic economic process, current pure surplus income is defined by its functional relation to other explanatory conjugates in the mathematical expressions representing the functionings interval after interval and round-and-round of the process.[2]

Pure surplus income is understood as a macrodynamic monetary circulation; and its rate  – whether considered as instantaneous or as a periodic difference  –  is a macrodynamic rate of circular returning.

Because pure surplus income is contained, but veiled in, accounting categories such as interest income, retained earnings, dividends, wages, salaries, bonuses, and benefits, economists and entrepreneurs fail to intellectually escape from and transcend their accounting categories and can’t properly understand the flow of pure surplus income as an explanatory conjugate reminiscent of explanatory conjugates such as electric intensity, magnetic intensity, Newtonian mass, Einsteinian mass, force, pressure, heat, etc..  Yet the economists do have a vague sense or inkling that something distinctively conceptual, systematically significant, and proper to the norms is proceeding at a rate.

entrepreneurs consider that they are having tolerable success when they are not merely “making a living,” no matter how high their standard of living, and not merely obtaining sufficient receipts to purchase all the equipment necessary to overcome obsolescence, but also receiving an additional sum of income which is profit in their strong sense of the term.[ CWL 15, 146]

In the surplus-expansion phase (the “surplus expansion phase” where dQ”/Q” > dQ’/Q,  both > 0), the secondary rhythms are widening and deepening themselves. … Hence in the surplus-expansion phase the surplus ratio S [3] is increasing. Surplus activity, surplus expenditure, and net surplus income are becoming greater and greater.  To make a large profit is, in the general case, not a matter of brilliant enterprise.  It is inevitable. …In the basic-expansion phase, where dQ”/Q” < dQ’/Q,  both > 0, the surplus rhythms are widening and deepening the basic rhythms. … S is some proper fraction, but it is decreasing.  No matter how intelligent and efficient traders may be, S cannot but be decreasing; for with surplus expenditure decreasing, net surplus income cannot but follow suit. … In the static phase, S is zero.   The industrial structure is not becoming bigger.  In the aggregate, there is no surplus income.  When the whole motive force of economic activity is based on the anticipation of profits (in entrepreneurs’ strong sense of the term), this variation in net surplus income will be projected resonantly throughout the whole economic field.  The increasing surplus ratio S of the capitalist phase heralds the bright dawn of a boom.  The decreasing surplus ratio of the materialist phase overclouds the heavens and foretells a hurricane.  The zero surplus ratio of the static phase is the most incomprehensible of mysteries, for what can be done when there is no net surplus income?[4][CWL 21, 51-52]

For an expansion of the economic process, the Central Bank and the commercial banking system expand the money supply correlative to the expansion in magnitude and frequency of transactions.  This is normally accomplished by issuing credit, not by draining money from the basic circuit into the surplus circuit. This incremental money will circulate repetitively, initially as a capital-expenditure outlay, circulating as pure surplus income becoming more capital expansion outlay, again becoming another round of pure surplus income period after period according to the up and down of Figure 27-1 (above).  The production of new and better human and material capital each period is a functional flow of skills and products; and it is subject to acceleration, deceleration, and tapering.  In a distorted case, it may be excessive (a “bubble-boom”, e.g. production of more machines than the process needs and/or faster than the system can digest) and then contractionary (to effect a systematically necessary, corrective “recession-slump”).  In any case, in an economy initially running smoothly at full current capacity, an expansion of production initially requires credit for investment in new capital, and, in this aspect as income over and above that needed for a standard of living, we call these circulating investable funds “pure surplus income.”[5]

Since this monetary correlative of capital expansion a.) is not spent on a standard of living and, therefore, is neither basic income nor macroeconomic cost as we have defined it, and b.) is not ordinary surplus income to be spent on repair and maintenance of existing capital, it is pure surplus income.

Pure surplus income, – whether saved or borrowed – while it exists, is money in someone’s bank account until it flows in an electronic debit-credit flash to pay for an investment.  Thus expansionary investment outlay as a Use of money has pure surplus income AKA systematic macroeconomic “profit” or credit as its Source.[6]

Incremental-to-the-money-supply fiat money is normatively dedicated initially then repeatedly to an accumulation of new investment, and then gradually, when marginal productivity gradually declines and favorable prospects for new investment diminish, this money would become necessary for payments dedicated to repair and maintenance of the large accumulations of capital over the several years.  That is, it is used initially exclusively as pure surplus income, but gradually more and more of this money morphs to the extent needed into ordinary surplus income for repair and maintenance.  The new money remains in the system to the extent needed as part of the permanently enlarged money supply for a permanently enlarged system of production and payments.

The new money’s normative circular return as pure surplus income for new investment, period after period, within the surplus functioning is, in the aggregate, a pure surplus return to entrepreneurs, period after period.  It is a repetitive circular functioning whose aspects of income, investment and ownership are manifested in the repetitive building up of an accumulation of static wealth.

Normatively, expansionary money should not leak out of the surplus circuit and become productively-idle, bloating the pricing[7] in the secondary markets for previously-issued stocks and bonds.  Rather it should normatively keep circulating in its proper operative surplus circuit as pure surplus income for new investment or as ordinary surplus income for repair and maintenance, instead of resting productively idle.

Also, as we have noted, the resultant ownership of the accumulation of capital equipment constitutes static wealth; however, static wealth does not, in and of itself, constitute income.  Ownership is mere ownership evidenced by title and deed; it is distinct from income. However, ownership usually conveys the right and authority to demand dividend income as a distinct form of “rental payments”.  This interest or dividends down the road would constitute basic income, ordinary surplus income, or pure surplus income, depending upon the decision of the recipient. And, normatively, the recipients’ decisions for equilibrium and continuity should conform to the requirements of the phase of the cycle for basic expenditures for a standard of living, ordinary surplus expenditures for R&M, and pure surplus expenditures for wider and/or deeper investment.  The ,one in the system should be being put to use, with the possible exception of money for retirement or philanthropy not, perhaps, yet needed for such eventualities.

Note, first, that an original amount of money can function as purchase money period after period, thus generating a multiplied value of its unchanging self as it finances pure surplus investment interval after interval.  This multiplication as pure surplus income is not a phantom multiplication any more than the new resultant capital produced and installed period after period is phantom capital; ownership of the new capital is being cumulatively achieved and the accumulating new capital equipment will have an accumulating value determined by its productive functionality.

However, any capital expansion is finite within a system conditioned by finite population, finite materials, boundaried propensities to consume, technically boundaried productivity, and inevitable depreciation.  As the expansion slows and the requirements for repair and maintenance of the accumulated capital mount, pure surplus income in the succeeding periods will diminish to zeroThe halcyon days of accumulating static wealth will come to an end.

Note, second, that, in the aggregate, the amount of new money required in the determinate expansion will be determined by the requirements for increased initial and transitional payments of the expansion’s turnover magnitudes and turnover frequencies.

Note, third: In any double-entry system of bookkeeping, debits equal credits.  What is borrowed is owed.  What is loaned out by Smith to Jones is simultaneously receivable by Smith from Jones. Thus one party’s Loan Receivable is another party’s Loan Payable.  We may think of the (central and commercial) bankers and entrepreneurs as a collective, so that, accountingwise, an original infusion of $100 is a debit-receivable on the books of the lending, money-creating (central and commercial) banks and a credit-payable on the books of the entrepreneurs of the collective; it then, functionwise, becomes pure surplus income of the collective and is received and reloaned by individuals repetitively etc; so that in all future periods the repeating expenditures of $100 per period remain as financed by the original infusion of $100.  Thus, the net amount of the Loan Receivable and the Loan Payable of the collective is always $100.  Functionwise, we may think of individual producing units of the entrepreneurial group enjoying pure surplus income and lending to others in a series of instances, so that total Loans Receivable and total Loans Payable mount up serially to a higher number. However, in this latter case also, the Loans Receivable and Loans Payable offset each other and finally net to the original $100.  In a long-term expansion, the same money can recirculate each period, but wealth continues to accumulate each period as machines are produced and installed.

More efficient machinery, since it produces more per period and per person, is worth more than the older, less efficient, capital equipment.  Thus, previously-successful, risk-taking entrepreneurs and doers have to write down the money value of, i.e. suffer a loss of, static wealth on the older equipment which has been replaced. The stagecoach is replaced by the train. Schooners have been dismantled and replaced by freighters.  One or two steam shovels go into a museum while the rest are replaced by the diesel-fueled excavator.  Inefficient printing presses go to the scrap heap.  Balance-sheet, net-worth empires continually vanish as others come alive in a creative-destructive economy.

To be sure, an individual risk-taker possessing static wealth may opportunely cash in by selling his equipment to another individual within the redistributive function.  But, in this mere exchange of title,  the seller’s inflow is the purchaser’s outflow, and the net flow of money in the aggregate of cash-in cash-out swaps of title is zero. Therefore, in the aggregate, mere exchanges of title to ownership are not operative productive acts.  A swap of one million shares of General Motors has a net cash flow of zero (except for the broker’s services).  And a big exchange of one million shares of General Motors does not produce a single car.  The money staying within the redistributive exchange does no work!  The asset’s negotiability means only that one owner may outwit another.

It is a mistake to think of the new money in the aggregate as being borrowed, spent, recaptured, and used to pay down the loan.  That would amount to a spike of the money supply and of investment followed by an equal collapse of the money supply and ongoing investment.  In contrast, we are specifying a permanent expansion or enlargement of the economic activities of producing new capital, satisfying higher repair and maintenance activity, and producing more consumer goods, requiring a permanently-enlarged money supply based on original investment loans and working-capital loans.

Following the capital expansion, there would be two financing requirements: one for repair and maintenance of the new capital equipment as it deteriorates with use, and a second for adequate working-capital money to finance the circle of production and purchase of increased consumer goods.  Thus the costs of this increased production of consumer goods would include the costs of repair and maintenance (c”O” = p”a”Q”)[8], as well as the wages, salaries, interest and materials in the consumer-goods production cycle (c’O’ = p’a’Q’)[9].   Thus the seller of consumer goods would price these goods so as to at least cover his operating and maintenance burden.

The overall financial benefit to an investor-owner in a capital-expansion project may be subdivided or stratified or arranged more or less continuously into layers of ownership whose value and income would be related to the estimated amount of risk assumed in the project.  At the bottom might be a layer of bonds enjoying a relatively low rate of interest because strongly secured by collateral, and, at the top, a potentially high gain or loss in wealth and dividends accruing to investors in risky equities and claims on risky equities.

However, the continuity of the process in the ultimate static phase after complete gestation of the newer, more efficient process and the reduction of pure surplus income to zero, would require each recipient of interest or dividend income in all strata to direct all this income to a.) his own standard of living (including legitimate government services received), no matter how high, b.) government and transfer payments or, c.) philanthropic donations to uplift the culture and the material resources of the community.

[1]which may be expressed in the form of a comparison of present values.


[2]See CWL 3, 79-82/102-105; and 434-39/460-63

[3]The symbol Swas changed to vin CWL 15, as in f = vw  CWL 15, 148

[4]The cynic would say sarcastically, “The following can be done: Destroy lending standards and cause a housing bubble.”

[5]Ftnt re psi

[6]There is a sense in which one may speak of the fraction of basic outlay that moves to basic income as the “costs” of basic production.  It is true that that sense is not at all an accountant’s sense of costs; for it would include among costs the standard of living of those who receive dividends but would not include the element of pure surplus in the salaries of managers; worse it would not include replacement costs, nor the part of maintenance that is purchased at the surplus final market………..But however remote from the accountant’s meaning of the term “costs,” it remains that there is an aggregate and functional sense in which the fraction…….is an index of costs.  For the greater the fraction that basic income is of total income (or total outlay), the less the remainder which constitutes the aggregate possibility of profit.  But what limits profit may be termed costs.  Hence we propose ….to speak of c’O’ and c”O” as costs of production, having warned the reader that the costs in question are aggregate and functional costs…. CWL 15 156-57


[7]thus simultaneously reducing the purchasing power within the specific secondary markets

[8]CWL 15, 157

[9]CWL 15, 157