We wish to remove some of the mystery surrounding a) interest rates and their manipulation, b) the circulation of both interest payments and principal, and c) the ambiguity of the utterance rate of return associated with an investment.
In general, relative to interest rates and payments, we recognize and distinguish:
- Money – whether from the operative circuits or borrowed – is part and parcel of every exchange in the non-barter process of production and exchange for value.
- The interest rate is the rental rate for borrowed money.
- The element of interest – whether zero or positive – associated with any particular exchange – whether basic or surplus outlay or expenditure – is assignable as a real monetary element of that particular transaction.
- The function of credit is to fill the gap in time between payments made and payments received.
- Money sitting idle under a mattress or in a non-interest-bearing cash account, rather than an interest-bearing bank account, is a type of temporary zero-interest lending to oneself.
- Fixed interest rates
- Floating interest rates
- The interest rate negotiated in an overloaded or underloaded market for loanable funds may differ from the theoretical interest rate = growth rate calculated purely on the basis of possible growth in the real economy of production and exchange of goods and services.
- Jones (as bank or individual person) lends to Smith (as entrepreneur or consumer). There are two parties in a loan.
- Smith pays an interest-return to Jones; then the interest payments circulate from Jones to others like any other payments in the semi-continuous process of production and exchange.
- Jones uses the rented money for basic purchases, or for capital investment, or for gambling
- Some projects financed by savings, bank loans, bonds, or equity – especially long-term projects – are more interest-rate sensitive than others; some – like a rapid inventory turnover – are not appreciably interest-rate sensitive.
- The functional circulation of each of the elements of Outlays-Incomes-Expenditures-Receipts in two (or more) analytically distinguished circuits are a) correlated and concomitant, b) serially conditioning, c) serially fulfilling, d) therefore, constitute functionings to be related by their functional relations among themselves, and thus implicitly defined, and expressed mathematically in the implicit equations of an explanatory theory.
- Basic income is tiered. I’ = w’‚n’‚y’, (CWL 15, 134). In an inflationary period, relatively-vulnerable, lower-tiered, fixed-income earners experience reduction of purchasing power and gradually run out of money inducing a turn in the overall process from a high-demand inflationary trend to a deficient-demand deflationary trend, in which Outlays to employees fall by reductions and layoffs, therefore Incomes fall, therefore Expenditures fall, therefore Receipts fall in a corrective downward “spiral” of prices, contractions, and layoffs to the equilibrium for which the process has an exigence.
(In the basic expansion) … There is the same automatic mechanism as before. Prices fall. This has the double effect of increasing the purchasing power of income and bringing about an egalitarian shift in the distribution of monetary income. The increase in purchasing power is obvious. On the other hand, the egalitarian shift in the distribution of income is, in the main, a merely theoretical possibility. The fall of prices, unless quantities increase proportionately and with equal rapidity, brings about a great reduction in total rates of payment. Receipts fall, outlay falls, income falls. The incidence of the fall of income is, in the first instance, upon the entrepreneurial class, and so in the main it is a reduction of surplus income. Thus we have the same scissors action as before: purchasing power of income increases, and the proportion of basic to surplus income increases; the rate of saving is adjusted to the rates of production as soon as the price level falls sufficiently. But just as there is an upward price spiral to blunt the edge of the mechanism when the rate of saving is increasing, so there is a downward spiral to have the same effect when the rate of saving should be decreasing. Falling prices tend to be regarded as a signal that expansion has proceeded too far, that contraction must be the order of the day. Output is reduced; the income of the lower brackets is reduced; the adjustment of the rate of saving fails to take place; prices fall further; the same misinterpretation arises, and prices fall again. Eventually, however, the downward spiral achieves the desired effect; surplus income is reduced to the required proportion of total income; and the prices cease to fall. [CWL 15, 138-39]
- The process of production and exchange is intrinsically a process of value. Every product must mate with some other product to determine its relative “exchange value.”
Also see the list of the features of our analysis ofFunctional Macoeconomic Dynamics on page 3 of The IS-LM, AD-AS Models and the Phillips Curve Correlation. Click here.
Therefore, in this initial Preliminary Guidance on interest rates and payments, key subtopics will be
- the rate of interest-return charged on an individual loan negotiated in the market for loanable funds – one type of “rate of return”
- the rate of circulatory returning of pure surplus income for re-investment – another distinct type of “return at a rate”
- the functional flow of interest payments themselves, as payments to the lender for the money-rental services the lender provides, is functionally not different from payments directly to wage earners and managers of the lender, and indirectly to wage earners and managers of suppliers to the lender for the services and goods which they provide.
- all Outlays and Expenditures – whether immediately or with a lag – are payments of Incomes to people. Steel girders and ice-cream cones do not have a bank account.
Let us extract some clues from Webster:
intrinsic: belonging to the essential nature or constitution of a thing
extrinsic: not forming part of a thing, or on the outside of, a thing; originating outside a part and acting on the part as a whole
exogenous: caused by factors or an agent outside the economic process; introduced from or produced outside the organism or system
We identify what we call the “macroeconomic interest rate” as the natural indicial growth rate of the entire economic system or of some subsystem. The natural. normative, growth rate and macroeconomic interest rate are defined by a particular formulation intrinsic to the immanent intelligibility of the system. The rate is a calculation of the relation among explanatory functional flows. It consists of a certain set of relations expressing an immanent relationship within the system. These relations, as intrinsic, are not extrinsic; i.e. the set of relations is not “not forming part of “the system. The set does not, either marginally or totally, “originate outside the system.” A normative theoretical set expresses a normativity intrinsic to the current flows of products and payments which constitute the very system.
The utterances “return” and “rate of return” are used to denote several different economic phenomena. We will mention four. The reader is, no doubt, familiar with the first three phenomena; the fourth is specialized and unfamiliar to all but a few.
Each of the first three is an income-statement, microeconomic, periodic money payment associated with a specific investment. It is usually called an interest payment:
.a. the specific type of contractual interest – as a charge of rent for the use of money (and, virtually, for denial of financing what the money could otherwise finance) – charged on a loan or preferred stock for current working capital or a loan for the financing of a long-term project,
.b. the broader types of non-contractual “interest return” commonly called either “retained earnings” or “dividends” allotted to shareholders for rent of their assets previously-installed, and now continually owned and rented out, by these shareholders,
.c. in the financing of a non-interest-bearing bond sold at a discount, the realizable contractual price appreciation is the specific type of interest-return
The fourth conceptually-different type of return can be understood only within the theory of Functional Macroeconomic Dynamics. We may call it ”macroeconomic return.” It is by nature a current “circular return” of current investment monies to entrepreneurs in the aggregate. They are not receiving simple interest on a loan or equity investment; rather in their responsibilities as entrepreneurs they are receiving from the operative circuits monies over and above those needed for a standard of living, i.e. monies to be reinvested.
In this case, we have taken the utterance “return” and used it to denote the phenomenon of income sourced in the operative circuits whose sole purpose is investment in expansion. We have added another meaning and employed it to denote a determinate, current, aggregate, functional flow of pure surplus income for expansionary investment. In our somewhat narrow distinguishing sense, it is not a contractual return on past investment. It is a current flow to entrepreneurs as a group for reinvestment by entrepreneurs. It is the pure surplus income which finances an expansion redounding to the material and social benefit of society as a whole.
Since the monies return to entrepreneurs, they may be misinterpreted as returns on past entrepreneurial investment. They are not to be conceived as such. Macroeconomic return is a flow of so much per period; it is a rate; it is a ratio; it is a dx/dt or Δx/Δt of income for investment. It rises and falls. Note that the following graph is of a rate of change, not an accumulation. See the context in CWL 15, xx.
Therefore, the rate of circulation of pure surplus income called the “macroeconomic rate of return,” is a specific technical and explanatory meaning of the general, many-meaninged utterance “return.”
Rather than speak of a rate of return and risk ambiguity from misinterpretation, we might, using a time interval as the denominator, give it a specific name such as the Lonergan-Burley Ratio. A new name should awaken, perk up and prompt politicians, journalists, and academics to recognize a new explanatory concept; and it might prompt them to seek a scientific understanding of the velocitous functional interrelations, intrinsic to which is the “macroeconomic rate of return” of the current, purely dynamic process.
So, our fourth meaning of “return” is
.d. each period’s current return of pure surplus income to entrepreneurs-investors (as a group) for further expansionary investment
We should note here that this last meaning is a staple in Burley’s analyses. But it is not commonly used in the everyday parlance of TV talk shows’ so-called experts. This explanatory concept gets no “currency.”
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]
the prime cause is ignorance. The dynamics of surplus and basic expansion, surplus and basic incomes are not understood, not formulated, not taught….. [CWL 15, 82]
This pure surplus income 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 (for concomitant) capital investment: [CWL 15, 146]
Yet, as explanatory of a process which must be scientifically explained and understood so as to be properly managed, it deserves understanding, emphasis and respect. It is a special functional macroeconomic meaning for the bare utterance “return” to designate “current return for reinvestment”. And, since the return is at a rate with respect to time, there is a rate of return.
In order to understand macroeconomic return with respect to its source, its purpose, and its manner of circulation, we present a simple table. In the table, credit may be issued by the banking system each period to supplement pure surplus income for expansionary investment; previously-issued expansionary credit goes from outlays to incomes to expenditures to receipts; i.e. it circles back for reuse. However, two brakes get applied gradually to the expansion: First, marginal productivity declines as the field of opportunities for expansion gets saturated; second, the repair and maintenance requirements of the accumulated capital mount with mounting investment to impose accumulating monetary claims in the process. In the limit there are a) no further expansionary opportunities, and b) the credit money outstanding is getting directed to R&M just to maintain capacity.
We must be careful not to confuse the recircling of principal amounts, which we call either pure surplus income or returning growth money, with the charged interest (return) on the principal amount. With this proviso in mind, we will continue to pursue throughout this section a scientificunderstanding of a) the nature and purpose of credit, and b) the nature of the phenomenon of the macroeconomic return, including
- The norm and rule of expanding the money supply in an expanding economy by properly infusing the productive process with interest-bearing credit money; i.e. we seek to understand the nature and purpose of new credit money
- The repetitive circulation in the surplus circuit of the aggregates of principals of loans-for-investment
- The circulation in the operative circuits of the interest-payments associated with credit money
- The formulation of the nature of the macrodynamic return; i.e. the natural macroeconomic rate of return as normative and intrinsic to the economic process
- The Fed’s artificial exogenous manipulation of endogenous normal and normative macroeconomic interest rates as double-edged, distortive, and counterproductive
- The concept of the rate of the current circular returning of pure surplus income for investment as the current macrodynamic rate of return
To anticipate and preview one future conclusion: To avoid or correct the divergences and distortions colloquially called a “bubble-boom” or “recession-slump,” the managers of the economy should implement “factors that are prior to changing (transitive) interest rates and more effective.” As McShane said above, manipulation of charged interest rates is an inadequate strategy. Interest rates do not call the play. They are not the quarterback.
Traditional theory is faulty and deceptively ineffective. There are factors that “are prior to changing interest rates and more effective.”
Traditional theory looked to shifting(i.e. actively manipulating market) 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]
Manipulation of interest rates, in an attempt to adjust savings upward or downward, is based on a misunderstanding of both the double-edged nature of changing rates and the prior and more effective strategy of adjusting savings directly through the income flows in conformity with the requirements of the phase of the process.
The purpose of this section is to inquire into the manner in which the rate of saving w is adjusted to the phases of the pure cycle of the productive process. [CWL 15, 133]
The manipulation of interest rates is doomed to involve adverse effects.
Traditional theory looked to shifting interest rates (to manage the economy). The difficulty with this theory is that a.) it lumps together a number of quite different things and b.) it overlooks the order of magnitude of the fundamental problem… [CWL 15, 141-144]
Manipulation of interest rates “overlooks the order of magnitude of the fundamental problem.” In a surplus expansion, much money which should be saved for investment gets misdirected into the basic circuit for purchase of consumer goods to cause inflation therein and, thus, to reduce purchasing power.
it would take enormous interest rates backed by all propaganda techniques at our disposal to effect the negative values of dwi (where w symbolizes the propensity to consume of an income stratum i) that are required interval after interval as the surplus expansion proceeds; what is needed is something in the order of ‘incentives to save’ that is as rapid and as effective as the reduction of purchasing power by rising prices. … [CWL 15, 141-144]
The ineptitude of manipulating interest rates::
The ineptitude of the procedure arises not only from its inadequacy to effect a redistribution of income of the magnitude required (in the current phasic configuration of the process) … (T)he effect of raising interest rates to encourage savings (for investment) is not to keep the rate of saving and the productive process in harmony as the expansion continues but simply (and counterproductively) to end the expansion by eliminating (by discouragingly higher interest costs) its long-term elements. [CWL 15, 141-144]
Conversely, the effect of reducing interest rates – when savvy entrepreneurs in units of enterprise having adequate or excess capacity find little reason to invest – would be to stimulate an expansion of unsound investments by the non-savvy and opportunistic which are economically unjustified and, in the longer run, destined for default.
There are “factors that are prior to changing interest rates and more effective.” And perhaps we should repeat that these factors are mandated by a purely scientific Functional Macroeconomic Dynamics rather than by psychopolitical dispositions.
To increase the rate of saving (in a capital-goods-expansion phase), increase the income of the rich (who have a lower average propensity-to-consume percent). … to decrease the rate of saving (in a consumer-goods-expansion phase), increase the income of the poor (who have a higher average propensity-to-consume percent). … The foregoing is the fundamental mode of adjusting the rate of saving to the phases of the productive cycle. It reveals that the surplus expansion is anti-egalitarian, … but it also reveals the basic expansion to be egalitarian, for that expansion postulates that increments go to low incomes … [CWL 15, 135-37]
(In a capital expansion,) unless the quantity of money in circulation expands as rapidly as prices rise and, as well, as rapidly as the productive expansion of quantities requires, there will result a contraction of the process: then, instead of adjusting the rate of saving to the requirements of the productive cycle, the productive cycle is arrested to find adjustment to the rate of saving. [CWL 15, 135-37]
Proper cyclically-aligned shifts – antiegalitarian and egalitarian – in the distribution of income are “prior to changing interest rates and more effective.” But the egalitarian shift to higher basic incomes must be effected rather than resisted. Otherwise there occurs recession. Prior and more effective than manipulating interest rates is the proper cyclically-aligned shift in the distribution of incomes. This is not in any way a mere politically motivated statement; it is scientific, functional, macroeconomic dynamics.
… the root of the failure of the (macrodynamic) mechanism is the failure to obtain the anti-egalitarian shift in the distribution of income (so that aggregate basic incomes provide adequate demand for the increased quantity of consumption goods). [CWL 15, 138]
Again, the manipulation of market interest rates alone and without fiscal interference is, because of its double-edge, ineffective and counterproductive.
Rates of interest, when increasing (by artifice), encourage saving (but perhaps asymetrically discourage borrowing). This double edge is not the per se means of effecting the enormous shift in saving to bring about the transition from a slump or a basic expansion to a surplus expansion. What is needed is a contraction of purchasing power that will direct spending from the basic market of the poor to the surplus market of the rich. The surplus phase is anti-egalitarian…….
Similarly a(n artificial) lowering of interest rates may encourage the expansion of basic industry; but it also will encourage the expansion of well-intentioned but not well-thought-out innovations, the number of bankruptcies, etc. What is needed is the egalitarian shift in incomes, that will compensate for the previous and shorter anti-egalitarian shift, and will (use recently-expanded capacity to) produce the things that people really need and can learn to purchase. [CWL 15, 141 ftnt 198]
The daily or weekly impact of a charged annual rate of interest on short-term projects with rapid turnovers is small (Δi/365 or Δi/52) but in the case of multi-year projects, the n-year operating cost is large (n(di)). The short-term effect is weak; the long-term effect is strong and significant in analyzing investment prospects.
When the rate of savings is insufficient (to finance long-term projects), increasing interest rates effect an adjustment. This adjustment is not an adjustment of the rate of saving to the productive process but of the productive process to the rate of saving … it does not deserve the name 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, 144]
If the real economy were expected to grow at 3% per year, the real macroeconomic interest rate (excluding lender costs) would be 3% per year, which can be divvied up among financiers into tranches receiving less or more than 3% depending upon the degree of risk each assumes.
Any, so to speak, exogenous (artificial) manipulation of any of the several related explanatory functional elements natural to the whole integral organic productive functioning (the whole economic process) would exogenously and artificially distort the natural interest rate of the system. Conversely, any direct distortion (by, say, the Fed) of the intrinsic, natural interest rate would resonate to distort the entire set of flows-in-relation within the system of normative, constituent, interdependent flows. The distortion would, in accordance with the timing of the flows of initial, transitional, and final payments among units of enterprise, work its way through the tiers of income and the double-circuited, tiered system as stresses and strains on both prices and quantities creating winners and losers among individuals and enterprises in a distorted redistribution of incomes.
The natural normative growth rate and interest rate of a properly-managed economy, as intrinsic, natural and normative, are not to be – marginally or totally – artificially dictated or effected or affected or modified by factors or agents , acting as it were, outside the system. For central authorities to do so would indicate a misunderstanding of the economic process, or a careless contempt for the rules of the process, or a desperate corrective attempt to achieve the continuity and equilibrium proper to the principles and normative laws of the process.
The formal cause of the economic process is the immanent intelligibility of the process. This formal cause is expressed in a coherent set of terms in relational mathematical forms. This set constitutes the abstract primary relativities of the system. As a unified and fully comprehensive set of equations it would explain the system completely. It would express the pattern of dynamic interdependencies in the set of equations as isomorphic with the patterns constituting the process. The set would explain how the functioning elements of the system interact. It would tell how the system “works.” It is “a set of intelligible relations“; (it links) explanatory terms which are implicitly defined by the relations themselves; it is a set of abstract purely relational forms in which the explanatory terms are implicitly defined through theirrelations to all other elements.”
Ought there not to be introduced a technical term to denote this type of intelligibility? The trouble is that the appropriate technical term has long existed but also has long been misunderstood. For the intelligibility that is neither final nor material nor instrumental nor efficient causality is, of course, formal causality…what we have called the intelligibility immanent in sensible data and residing in the relations of things to one another, might be named more briefly formal causality or rather, perhaps, a species of formal causality. [CWL 3, 78/ 101-102]
… again, as to the notion of cause, Newton conceived of his forces as efficient causes, and the modern mechanics drops the notion of force; it gets along perfectly well without it. It thinks in terms of a field theory, the set of relationships between n objects. The field theory is a set of intelligible relations linking what is implicitly defined by the relations themselves; it is a set of relational forms. The form of any element is known through its relations to all other elements. What is a mass? A mass is anything that satisfies the fundamental equations that regard masses. Consequently, when you add a new fundamental equation about mass, as Einstein did when he equated mass with energy, you get a new idea of mass. Field theory is a matter of the immanent intelligibility of the object. [CWL 10, 154]
So, what is the “macroeconomic interest rate?” It is a particular ratio of change intrinsic to a particular unified set of functionally related velocities.
The productive process is, then the aggregate of activities proceeding from the potentialities of nature and terminating in a standard of living. Always it is the current process, and it is a purely dynamic entity. … the current process is always a rate of activity … the basic terms are rates (velocities) – rates of productive activities and rates of payments. CWL 15, 20-21
“Functional” is for Lonergan a technical term pertaining to the realm of explanation, … (He) illustrates his basic meaning of ‘explanation’ by referring to D. Hilbert’s method of implicit definition, (and he) went on to identify the contemporary notion of a “function” as one of the most basic kinds of explanatory, implicit definition – one that specifies “things in their relations to one another” (Insight 37-38/61-62)…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
Again, our normative macroeconomic interest rate is the monetary growth rate properly correlated in magnitude and frequency with the growth rate of productive output. Alternatively stated, it is the interest rate the lender(s) can achieve by financing the growth rate of productive output in the sectors of interest.
Lonergan’s analysis fully appreciates the purpose, or end, of the economic process. His initial premise is the nature of the economic process as, simply, a concrete process of production and exchange, rather than the textbooks’ process of “exchange and self-interest”, or later,” exchange and a vaguely defined psychological situation.”
He adopts a scientific, dynamic heuristic to understand and, so, explain this particular concrete dynamic process and he orders his analysis accordingly. (See Why Analyze Production First)
But I must note immediately how intimately the ordering is within the perspective: “as the hypothesis is the principle in mathematics so the end is the principle in praxis”. The movement of Lonergan’s analysis might be described as a paradigmatic descent from a concrete heuristic of the productive process determined by the end (purpose) of that process. The monetary order is conditioned by, and correlated to, the rhythms of production adequate to the end (purpose). [McShane 1980, 125]
our inquiry differs radically from traditional economics, in which the ultimate premises are not production and exchange but rather exchange and self-interest, or later, exchange and a vaguely defined psychological situation. Our aim is to prescind from human psychology that, in the first place, we may define the objective situation with which man has to deal, and, in the second place, define the psychological attitude that has to be adopted if man is to deal successfully with economic problems. Thus something of a Copernican revolution is attempted: [CWL 21,42- 43]
The wise person puts questions in their proper order.
Questions cannot be put in any order whatsoever. Some questions simply cannot be answered until others have been resolved. And sometimes the answers to one question immediately provide the answers to others. [CWL 12, 23]
… putting things in their right order is the special talent of the wise person, and so the wise person will start with the problem that is first in the sense (1) that its solution does not presuppose the solution to other problems, (2) that solving it will expedite solving a second problem, (3) that solving the first and second problems will lead right away to solving a third, and so on through all consequent connected problems. [CWL 12, 23]
Lonergan, first, observes dynamic interconnections, interdependencies, mutualities, and correlations within the productive process. He identifies productive rhythms determined by dependencies involving time lags; he formulates the dynamics of the current, purely dynamic economic process; then, and not until then, he analyzes the monetary circulations which would normatively meet the rhythms of production and exchange; so that, finally, he can formulate the immanent intelligibility, i.e. the primary relativities among velocitous flows of quantities and their prices, including the interest-price or opportunity-price of money in the market for loanable funds. From this he can reasonably conclude that artificial manipulation and distortion of one particular flow among several interconnected constituent flows – in this context the particular flows of interest payments – is an inadequate strategy of adaptation.
Only later in the analysis can one arrive at an adequate account of the monetary distributions commonly called wages and profits. That account springs from a characterization of possible types of productive rhythms which lead to the specification of the adequate human adaptation to the demands of the process, and also to a determination of inadequate strategies of adaptation such as variations of interest rates, varieties of taxation and monetary policy. [McShane 1980, 125]
McShane hints at misconceptions regarding interest rates and their manipulation stemming from failures to analyze the dynamic functional process (including government as we-individuals-collectively) as current, double-circuited, intrinsically surgelike, and having objective laws prior to and independent of human psychology, and. The mistaken conceptual relations of inadequate, flawed theories of academic economists are many and they include
that investments equal savings; that interest rates call the play; that retained earnings are key; that gold grounds confidence; that government is the mother of progress. [McShane 2017, 67]
McShane attributes to schools of macroeconomics particular conceptual errors proclaimed as true every day:
A range of difficulties can occur to you at this stage, especially if you are versed in the strategies of Keynesians or Friedman, or share common clouded notions: that investments equal savings; that interest rates call the play; that retained earnings are key; that gold grounds confidence; that government is the mother of progress. [McShane 2017, 67]
Again, consistent with our insistence on Functional Macroeconomics Dynamics being an explanatory science, rather than simply describing all interest rates as a sum of a risk-free component plus risk-filled premiums for inflation, business risk, political risk, and foreign-exchange-rate risk, we must distinguish between
- the quantity called the microeconomic contractual interest return negotiated and agreed to on a particular loan, and
- the explanatory aggregate identified as the expanding and tapering flow of macroeconomic pure surplus incomes flowing in the current dynamic process to the entrepreneurial group as a whole.
We shall call the latter “pure surplus income” and explain it as the current normal circulatory returning to entrepreneurs as a group of the incomes over and above the basic incomes to be devoted to purchasing point-to-point basic items (roughly consumables). These savings-to-be-invested constitute a normal flow in an economic expansion.
The reader may be familiar with various conventional formulae embodying the microeconomic interest rate charged on a loan or bond in the market for loanable funds, where P stands for principal, i stands for the interest rate, (r = 1+i) stands for “interest factor”, t is the subscript for time, and e is the base of the natural logarithm.
In the case of simple interest: Pt = P t-1r t-1
In the case of compound interest: P t = P0r t
In the case of continuous interest: Pt = P0eit
These conventional microeconomic formulae negotiated between borrower and lender do not constitute explanatory conjugates of the entire macroeconomic system; they are isolated microeconomic calculations by and for investors, borrowers, and speculators; they do not explain all, or even part, of the whole interconnected system of Gross Domestic Functional Flows; they do not, because they are merely microeconomic calculations, constitute all or part of the immanent intelligibility of the double-circuited, credit-centered, economic process; they do not help to explain the current, purely dynamic macroeconomic process – no matter how much financial-talk-show blab there may be about them.
The flows of actual interest payments are not functionally different from the flows of Smith-to-Jones payments for labor, legal fees, paper clips, etc.
The explanation of the whole dynamic process must be based upon abstract explanatory conjugates of systematic significance, scientific significance, explanatory significance. The isolated microeconomic calculations of bankers, businessmen, and speculative investors do not qualify as elements of systematic, scientific, and explanatory significance. Instead, the whole dynamic process must be understood as an intelligible unity of interconnected velocities of which the flows of interest payments are not functionally different from the flows of payments for labor, legal fees, paper clips, etc.; it must be formally explained by a cluster of abstract explanatory relations forming a single unified understanding. Terms must cohere in individual equations; and equations must cohere with one another in a comprehensive unified explanation. And the unified set of relationships will, as such, qualify to constitute a hypothesis to be verified, and when verified, a theory which explains.
If, in contrast to a whole unitary theory, the productive and monetary functionings were scattered as a mere congeries of isolated pieces, there would be no organic whole being explained. Consider:
Generalization comes with Newton, who attacked the general theory of motion, laid down its pure theory, identified Kepler’s and Galileo’s laws by inventing the calculus, and so found himself in a position to account for any corporeal motion known. Aristotle, Ptolemy, Copernicus, Galilei, and Kepler had all been busy with particular classes of moving bodies. Newton dealt in the same way with all. He did so by turning to a field of greater generality, the laws of motion, and by finding a deeper unity in the apparent disparateness of Kepler’s ellipse and Galilei’s time squared. … Similarly the non-Euclidean geometers and Einstein went beyond Euclid and Newton. … The non-Euclideans moved geometry back to premises more remote than Euclid’s axioms, they developed methods of their own quite unlike Euclid’s, and though they did not impugn Euclid’s theorems, neither were they very interested in them; casually and incidentally they turn them up as particular cases in an enlarged and radically different field. … Einstein went beyond Newton by employing the new geometries to make time an independent variable; and as Newton transformed the formulation and interpretation of Kepler’s laws, so Einstein transforms the Newtonian laws of motion. … It is, we believe, a scientific generalization of the old political economy and of modern economics that will yield the new political economy which we need. … Plainly the way out is through a more general field. [CWL 21, 6-7]
Lonergan’s achievement was to bring together all these scattered theorems by setting up a unitary basis that would handle all of them and a great number of others as well – like the achievement of Euclid and Newton.
… a science emerges when thinking in a given field moves to the level of system. Prior to Euclid there were many geometrical theorems that had been established. The most notable example is Pythagoras’ theorem on the hypotenuse of the right-angled triangle, which occurs at the end of book 1 of Euclid’s Elements. Euclid’s achievement was to bring together all these scattered theorems by setting up a unitary basis that would handle all of them and a great number of others as well. … Similarly, mechanics became a system with Newton. Prior to Newton, Galileo’s law of the free fall and Kepler’s three laws of planetary motion were known. But these were isolated laws. Galileo’s prescription was that the system was to be a geometry; so there was something functioning as a system. But the system really emerged with Newton. This is what gave Newton his tremendous influence upon the enlightenment. He laid down a set of basic definitions, and axioms, and proceeded to demonstrate and conclude from general principles and laws that had been established empirically by his predecessors. Mechanics became a science in the full sense at that point where it became an organized system. … Again, a great deal of chemistry was known prior to Mendeleev. But his discovery of the periodic table selected a set of basic chemical elements and selected them in such a way that further additions could be made to the basic elements. Since that time chemistry has been one single organized subject with a basic set of elements accounting for incredibly vast numbers of compounds. In other words, there is a point in the history of any science when it comes of age, when it has a determinate systematic structure to which corresponds a determinate field. [Method,241-42]
Newton set down laws of motion and proceeded to demonstrate that if a body moves in a field of central force, its trajectory is a conic section. He set out with a minimal cluster of insights, definitions, postulates, axioms and proceeded to account for the laws that had previously been empirically established, bringing them into a single explanatory unity. ¶A single insight yields a conception, a definition, an object of thought; but from a cluster of insights, you build up a system of definitions, axioms, postulates, and deductions. We have to note that a system is quite an achievement; systems are not numerous. There are Euclid’s geometry and subsequent developments in geometry, Newton’s mechanics and dynamics and the building upon Newton, and the Mendeleev table in chemistry. System then is the expression of a cluster of insights. CWL 5, 52
Now the general theorem of continuity is that this (organic whole) has a nature that must be respected. … to violate this organic interconnection is simply to smash the organism, to create the paradoxical situation of starvation in the midst of plenty, of workers eager for work and capable of finding none, of investors looking for opportunities to invest and being given no outlet, and of everyone’s inability to do what he wishes to do being the cause of everyone’s inability to remedy the situation. Such is disorganization. Continuity, on the other hand, is the maintenance of organization, the stability of the sets and patterns of dynamic relationships that constitute economic well-being in a society. [CWL 21, 74]
 Re meaning of scientific from standards footnote
See first excerpt below.
in the transitive sense of “shifting”
Please see the Section entitled Edifice of Formulae in which the formulae below are organized.
Implicit definition of “costs” and “profits” 
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. …
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.