Concluding Remarks

In Lonergan’s treatment the manipulation of interest rates he stated:

.1. Traditional theory looked to shifting interest rates to provide suitable adjustment.  In the main we shall be concerned with factors that are prior to changing interest rates and more effective. [CWL 15, 133)

.2. The traditional doctrine of thrift and enterprise looked to the supply of and demand for money to adjust interest rates and the adjusted rates to adjust the rate of saving to the requirements of the productive process.  But it can be argued that a) this view was not sufficiently nuanced in its estimate of the requirements of the productive process, b) that it missed the magnitude of the problem, and c) that it tended to lump together quite different requirements. … [CWL 15, 140, ftnt. 197]

After carefully analyzing the effect of higher interest rates on a) point-to point production and consumption costs, b) inventory costs in the case of more or less rapid turnovers, and c) project costs in the case of long-term point-to-line projects, Lonergan concluded,

.3. ¶ … , the following conclusions seem justified.  When the rate of saving is insufficient, increasing interest rates affect an adjustment.  This adjustment is not a (simple and easy) adjustment of the rate of saving to the (requirements of the) productive process but (rather a difficult adjustment) of the productive process to the rate of saving; for small increments in interest rates tend to eliminate all long-term elements in the expansion; and such small increments necessarily precede the preposterously large increments needed to effect the required negative values of dwi.  Finally, the adjustment is delayed, and it does not deserve the name of adjustment.  It is delayed because the influence of increasing interest rates on short-term enterprise is small.  It does not deserve the name ‘adjustment’ because its effect is not to keep the rate of saving and the productive process in harmony as the expansion continues but simply to end the expansion by eliminating its long-term elements. (CWL 15, 143-44)

One acknowledges that the premise of scientific macroeconomics is production and exchange rather than production and self-interest or production and some vague psychological preference: one acknowledges that expansions are limited by a.) finite resources, including population and skills, and b.) the extent of economically useful invention and innovation.  General differential equations of economic expansion include:

kn[f’n(t-a)-Bn] = f”n-1(t) – An-1  (CWL 5, 37) the lagged technical accelerator

DZ = PQ[(dP/P + dQ/Q + dPdQ/PQ) cos(A + dA) – 2 sin(dA/2) sin(A + dA/2)]

the change of price-quantity revenues in the interval

dI’ = Σ(widni + nidwi) yi   increment per interval of basic income

M’ = (S’ – s’O’) + (D’ – s’I’) + G  change ofthe basic money supply

P’Q’ = p’a’Q’ + p”a”Q” Implicit definition of macroeconomic expenditures and costs

df = vδw + wδv (CWL 15, 148) change of the pure surplus-income ratio

 δJ = δa’ + a”δR + Rδa”(CWL 15, 158) change ofthe basic price-spread ratio

The differential equations explain generally the shifting patterns among concomitant, correlated functional flows during any instance of systematic pure cycle of surgings and taperings of functional flows.

The few differential equations and their solutions explain, rather than describe, how the dynamic economic process normatively works.  They explain by internal interdependencies among themselves both equilibrium and divergent disequilibrium. They don’t merely describe.  They explain how the modern-day vast and intricate process is continuously unfolding in a wavelike pattern of surges and taperings, rather than of excessive surges and complete reversals, i.e. they explain how the process should actually work – not how it might feel or beseen by the egoistic individual in his microeconomic context, but rather how the overall functional process, constituted by concomitant, and interdependent, and implicitly defined functionings, should actually work.

The real growth rate is an intrinsic rate of growth of real production and sale.  In the normative process, the interest rate should equal the real growth rate, plus lender costs, plus any risk premium.

Beginning from a stable economic process which is merely reproducing itself, there is, first, a rise and tapering of the pure surplus production functioning which generates a later rise and tapering of the basic production functionings and as formulated by the lagged technical accelerator.  The application of scale factors to the relations among productivity and depreciation demonstrates the normative intensity 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 relations for a well-ordered, i.e. equilibrated, continuity and expansion of the dynamic economic process.

In general, all events good and bad are explained by an insight into the Diagram of Rates of Flow and the differentials above. The diagrams and equations on pages 55, 121-25, 164, and 174 of CWL 15 symbolize the interconnectings of rates of flow.  Any macroeconomic problem can be explained as divergences from the normative relations of the monetary flows through the channels.

The norms of the process may be violated by several agents, one of whom is the Central Bank, which may artificially distort a) the amount of dummy money required by the system, and b) the rental cost  – interest rate  –  of  dummy, money.  The Central Bank distorts the real cost and opportunity cost of long-term projects by erratically and wrongly price-fixing the dummy money. Excessively high interest rates discourage long-term projects, and excessively low interest rates encourage unsound and “zombie” projects and support inefficiency and waste. But the Central Bank is not the only agent of mismanagement; the participant community of government and private sector, operating on the premise of production and self-interest, and lacking a scientific, explanatory perspective, rather than adapting to the principles, laws, and normative precepts of the immanent intelligibility of the process, may distort the process in several ways: the basic or surplus subgroup of participants may drain the other subgroup’s monetary circuit to flood and inflate their own circuit; a union subgroup may misinterpret normal pure surplus income as excess profits and mistakenly demand higher wages because they misinterpret the existence of incomes to be dedicated to sound investment;  an industrial cartel may deleteriously fix the price of commodities; a surplus subgroup may overexpand and impose the systematic necessity of a corrective recession; in event of declining demand entrepreneurs may lay lower-paid workers off when they should be not only employing but also raising wages and salaries of lower-paid workers; a basic or surplus subgroup may starve the process by diverting much money into a state of disuse in the secondary markets  – 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 over expansion and necessitate 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 distortions and under-the-table, black-market activities.

All money flows among people in their capacities as workers and decision-making owners. (non-human items such as Iron ore, computers, paperclips, carrots, turkeys, 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 normative theory of the long-term expansion and its precepts of adaptation, all participants misunderstand and misinterpret the current state of economic affairs and react according to their instinct for survival and their premise of self-interest.  They reject enlightening normative theory and wander blindly into a commonsense descriptive bias; they are of the opinion and insist that economics is exclusively a matter of  current comparative wealth and current comparative incomes; and casual commonsense observance of current comparatives sees obvious demerit in real human merit and merit in real human demerit.  So, in ignorance politicians seeking reelection pander to voters and in ignorance voters vote.  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 and the dummy money supply. So the Central Bank manipulates overnight rates, longer-term rates, reserve requirements, and squeeze or inflate the money-supply balloon; then all self-healing developments for the better are credited to the manipulations and all turns for the worse call for further counterproductive remedies. Interest groups and political parties form and oppose one another.  The opposition is greater or lesser depending on the degree of benefit or disadvantage.

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 macroeconomic disequilibrium 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 field theory of the dynamic process.  To manipulate the natural interest rate is to stand in a tub and try 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 actually providing this type of income.  But the extraction of pure surplus income by the banker-producer combination, at a level above that being actually needed and being 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 at the wrong time 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.

Again,

.1. Traditional theory looked to shifting interest rates to provide suitable adjustment.  In the main we shall be concerned with factors that are prior to changing interest rates and more effective. [CWL 15, 133)

.2. The traditional doctrine of thrift and enterprise looked to the supply of and demand for money to adjust interest rates and the adjusted rates to adjust the rate of saving to the requirements of the productive process.  But it can be argued that a) this view was not sufficiently nuanced in its estimate of the requirements of the productive process, b) that it missed the magnitude of the problem, and c) that it tended to lump together quite different requirements. … [CWL 15, 140, ftnt. 197]

.3. ¶ … , the following conclusions seem justified.  When the rate of saving is insufficient, increasing interest rates affect an adjustment.  This adjustment is not a (simple and easy) adjustment of the rate of saving to the (requirements of the) productive process but (rather a difficult adjustment) of the productive process to the rate of saving; for small increments in interest rates tend to eliminate all long-term elements in the expansion; and such small increments necessarily precede the preposterously large increments needed to effect the required negative values of dwi.  Finally, the adjustment is delayed, and it does not deserve the name of adjustment.  It is delayed because the influence of increasing interest rates on short-term enterprise is small.  It does not deserve the name ‘adjustment’ because its effect is not to keep the rate of saving and the productive process in harmony as the expansion continues but simply to end the expansion by eliminating its long-term elements. (CWL 15, 143-44)

We have at one time or another, in one place or another, in one context or another, and in one manner or another addressed the issue of the (lack of) effectiveness of manipulating interest rates. This particular post should be read in conjunction with the reading of other posts:

Also, see CWL 15:

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)