The productive process is constituted by a hierarchy of levels of production.
Recall the equation called the lagged technical accelerator.
kn[f’n(t-a)-Bn] = f”n-1(t) – An-1[1]
The lagged technical accelerator states that the expansion of a level n precedes the expansion of the lower level (n-1) which the level n supplies. Assuming no slack in the economy, the first must happen at time (t-a) before the second happens at the later time t. Outlays for capital expansion precede the outlays for the expansion of consumer goods on the lowest level. One crescendo precedes the other. There is a rhythm.
And recall the equations for the two important ratios, P’/p’ and vI”/(I’ + I”), the basic price-spread ratio and the pure surplus-income ratio; and recall their differentials:
P’/p’ = a’ + a”(p”Q”Ordinary Surplus/p’Q’Basic)
or
J = a’ + a”R
and its differential
and its differential
The basic price-spread ratio J– selling price index divided by cost price index – depends critically on the ratio of surplus activity to basic activity p”Q”/p’Q’. And the ratio of pure surplus income to total incomes depends critically on the amount of pure surplus income in total surplus income.
Acknowledging that expansions are limited by a.) finite resources, including population, b.) the power of innovations affecting both surplus and basic functionings at different times but fairly equally,[5]and c) technical coefficients finitely relating quantities to one another, the differential equations
kn[f’n(t-a)-Bn] = f”n-1(t) – An-1[6]
explain the changes among functional flows during a general, systematic, sequential pattern of surgings and taperings of these functional flows.
Repeat: the differential equations and their solutions explain. They don’t describe. They don’t furnish loads of statistics after the fact. The explain how the process is continuously unfolding, how the process is actually working.
There is, first, a rise and flattening of the pure surplus production functioning which generates a later rise and flattening of the basic production functionings. The application of scale factors to the relational coefficients of consumption, depreciation and productivity yields the normative levels of surges of capital-then-consumables product flows conjoined to and correlated with surges of pure-surplus-income-then-basic-income flows. The economic community is challenged to adapt to these normative levels for a well-ordered, i.e. equilibrated, continuity and expansion of the economic process.
In general, all events good and bad are explained by an insight into the Diagram of Rates of Flow and the differentials just above. The diagrams on pages 55, 121-25, 164, and 174 of CWL 15 symbolize comprehensively both the normative and the non-normative rates of flow. Any macroeconomic problem can be explained by an understanding of the relations of the flows through the channels.[9] And every academic should understand the macro-economy in the forms of the interconnected, implicitly defined rates of flow as symbolized graphically in diagrams and operationally in the differentials.
The norms of the process may be violated by several agents, one of whom is the Central Bank, which may artificially distort the rental cost – interest rate – of productive activity’s dummy, money. The Central Bank distorts the costs of expansion by price-fixing dummy money. But the Central Bank is not the only agent of mismanagement; the participant community, operating on the premise of production and self-interest, and lacking a scientific, explanatory perspective, may distort the process in any number of ways: the basic or surplus subgroup may drain the other subgroup’s circuit to flood and inflate their own circuit; a union subgroup may price-fix wages or mistakenly demand higher wages because they misinterpret normal pure surplus income as excess profits; an industrial cartel may fix the price of commodities; a surplus subgroup may overexpand and impose the systematic necessity of a corrective recession; entrepreneurs may lay workers off when they should be not only employing but also raising wages and salaries; a basic or surplus subgroup may divert money into a secondary market – where that money, now drained from the productive circuits sits productively idle – and undermine the demand required within the operative circuits for continuity.
Artificially changing the normative flows of money which are required to keep the system in dynamic equilibrium will necessitate associated corrective, compensatory actions. Flooding the surplus circuit by draining the basic circuit will cause a compensating contraction. Flooding the basic circuit will induce inflation and, by a series of reactions, stifle the full surplus expansion. Price-fixing of wages or commodities induces cost distortion and under-the-table, black-market activities.
All money flows to people in their capacities as workers and owners-decision makers. (Iron ore, computers, paperclips, vegetables, machines and factories do not have bank accounts.) The losing participants in a distorted economy experience the stresses and the strains of the disorder. Lacking a scientific, explanatory perspective and, therefore, in ignorance of the unbiased theory of the long-term expansion and its norms of adaptation, all participants misunderstand and misinterpret the current state of economic affairs and react according to their premise of self-interest and to their instinct for survival. They fall into a commonsense bias; they state that[10]economics is very much, though not exclusively, concerned with the current state of affairs, i.e. current comparative wealth, current comparative incomes, current employment, current productivity, etc.; and casual commonsense observance of current comparatives sees obvious demerit in merit and merit in demerit. They call for, or enact themselves on their own behalf, distortive or deformative intervention and manipulation of the system. And in total ignorance they proclaim as the magical cure-all of all problems the manipulation of market interest rates. So the Central Bank manipulates overnight rates, longer-term rates, and reserve requirements, then all self-healing turns for the better are credited to the manipulations and all turns for the worse call for further distortion.
The economy can be properly managed only if the managers understand its dynamics; i.e. understand how the economic process really works.
First, the current state of affairs can be understood, and proper remedies to non-normative variations can be decided, only by an understanding of the dynamics of how the economy actually works. This understanding coupled with the analysis of reliable, historical, time series of relevant aggregate data will reveal how exactly the participants brought the process to the current state of affairs and how they should proceed correctively from here.
Second, miscasting the macroeconomic interest rate as an exogenous, manipulable efficient cause is to misunderstand the intrinsic relations of the dynamic process. It is like thinking you are standing outside a tub operating an all-purpose, all-powerful, external lever, when in fact the interest rate is only one internal relation of the structure in which you are standing. It is like standing in a tub and trying to lift it.
Third, it is not only the Central Bank which acts counterproductively. The flow of pure surplus income, the rich getting richer, is a good thing to be maintained at an equilibrating level while the economy is expanding and providing this type of income. But the extraction of pure surplus income by the banker-producer combination at a level above that being actually provided by the system in its normative course must eventually cause contractions, liquidations, and layoffs and a damaging of the system which has been built. In a basic expansion, workers must be retained and paid higher wages. And, on the other hand, the lower-paid groups’ must understand that the ordinary-surplus-income and the pure-surplus-income portions of the microeconomic accounting profits function only to maintain and expand the system for everyone’s benefit. Strikes for higher wages out of season will cause inflation and lead to diminishing use of capacity.
In sum, the root problem is the failure to understand the immanent intelligibility, or formal cause,of the process; this ignorance results in participant groups becoming the efficient cause of problems and counterproductive remedial actions. And in particular, the failure to implement the basic expansion by reducing savings and increasing the income of the lower-paid participants explains inadequate demand, contractions, liquidations, and layoffs and the self-destruction of the system which has been built.
[5]One may expect the increment of a volume to stand to the increment of a surface as the volume does to the surface. To suppose the contrary leads to absurd conclusions…….New ideas and new methods increase existing efficiencies in both the surplus and the basic stages; the ratio between the quantity of surplus and the quantity of basic products per interval is not a matter of efficiency but of the point-to-line correspondence involved in any more roundabout method. CWL 15, 124
page 175 explaining stagflation
pages 160-61 explaining crises
page 162 explaining speculative booms in the stock market
page 158-162 explaining the variations in the basic price-spread (ratio)