“Basic” and “Surplus”

The form of any element is known through its relations to all other elements. [CWL 10, 154]

In Functional Macroeconomic Dynamics an explanatory term is not defined by Webster, Oxford, or American Heritage; it is implicitly defined by its functional relation to all other functional elements.  In the implicit definition the terms fix the relations, the relations fix the terms, and insight fixes both.  Such a scheme of functional relations defines the terms “basic” and “surplus.”

A distinction has been drawn between description and explanation.  Description deals with things as related to us.  Explanation deals with the same things as related among themselves.  …  The relations of things among themselves are, in general, a different field from the relations of things to us. … The scientist selects the relations of things to us that lead more directly to knowledge of the relations of things among themselves.  Ordinary description is free from this ulterior preoccupation. [CWL 3, 291-92/316-17]

… Lonergan’s critique (shows that) by using the technique of implicit definition, the emphasis shifts from trying to define the relevant variables to searching heuristically for the maximum extent of interconnections and interdependence; and that the variables discovered in this way might not resemble very much the objects (or the aggregates) which, in the first instance, one was thinking about. [Gibbons 1987]

On the one hand, there is the movement of empirical science from description to explanation, from proper domains of data to systems of laws that implicitly define the terms they relate; and at the end of this movement there is the ideal goal that is to be attained when all aspects of data, except the empirical residue, will have their intelligible counterpart in systems of explanatory conjugates and ideal frequencies. [CWL 3, 313/337]

Consumer goods are produced in the current, purely dynamic economic process and then exit the current process to be consumed in a standard of living. To emphasize: consumer goods are goods which are, first, under process, and then, exit the current process.

In contrast, producer goods are produced, but then remain in the process to accelerate the production of consumer goods or other producer goods.  We call consumer goods basic goods and we call capital goods surplus goods.[1]

The economic process is a threefold process consisting of 1) a “basic circuit of production and sale”, 2) a “surplus circuit of production and sale”, and 3) “finance” of the basic and surplus activities.

In Functional Macroeconomic Dynamics, be careful to distinguish two meanings of “basic”: 1) synonymous with fundamental or foundational, especially in discussions of the fundamental postulates and equations upon which the entire science is constructed, 2) having to do with consumer goods and services.

The excerpt below regards economic functionings; functionings are implicitly defined by their functional relations to one another.  The whole structure is purely relational rather than composed of given absolutes

… (our fundamental scientific) terms (velocities) are defined by their functional relations.  In the threefold process, the maintaining (distinct process 1)of a standard of living is attributed to a basic process, an ongoing sequence of instances of so much every so often. The maintenance and acceleration (distinct process 2) of this basic process is brought about by a sequence of surplus stages, in which each lower stage is maintained and accelerated by the next higher.  Finally, transactions that do no more than transfer titles to ownership are concentrated in a redistributive function, whence may be derived changes (distinct process 3) in the stock of money dictated by the acceleration (positive or negative) in the basic and surplus stages of the process. [CWL 15, 53-54]

Lonergan held the diagram to have both explanatory and heuristic significance.  First, then, the later versions of the Essay in Circulation Analysistext draw ever-greater attention to the fact that Lonergan was seeking the explanatory intelligibility underlying the ever-fluctuating rhythms of economic functioning.  To that end he worked out a set of terms and relations that ‘implicitly defined’ that intelligible pattern.  When all was said and done the relations, and the terms they implicitly defined, were markedly different from either the terms of ordinary business parlance or the terms of neoclassical and Keynesian economic theory. … So, for example, the existence and manner of dynamic mutual interdependence of the two circuits of payment, basic and surplus, is not adequately expressed either by descriptive terms (since this pattern does not directly relate to the senses of anyone operating in a common-sense way in a concretely functioning economy) nor by the series of (simultaneous) equations that do not explicitly manifest the interchanging of ‘flows.’ [CWL 15, 179]



Primitive hunters take time out from hunting to make spears, and primitive fishers take time out from fishing to make nets.  Neither spears nor nets in themselves are objects of desire. … the comparatively brief time spent making spears or nets is amply compensated by the greater ease with which more game or fish is taken on an indefinite series of occasions. … As pieces of material equipment, the same objects are initial instances of the idea of capital formation.  Now the history of man’s material progress lies essentially in the expansion of these ideas. … they expedite and accelerate the process of supplying the goods and services that are wanted by consumers. [CWL 3, 207-208/233]


It is as well to focus again on the main insight of our analysis so far, how the surplus levels and the basic level relate. [McShane 2017, 42]

Broadly, the basic process involves producing and selling consumer goods for a standard of living, while the surplus process involves producing and selling producer goods such as factories, fishing nets, threshers, front-end loaders, managerial skills, and generally improvements upon nature for a future greater bounty in the standard of living. Peanut butter is usually a basic item; i.e. an item in a person’s standard of living. On the other hand, a $1.0 billion chemical processing plant is not consumed in one’s standard of living; it is a long-lasting surplus item to be employed period after period into the indefinite future.

…  the correspondence between elements in the productive process and elements in the standard of living may be a point-to-point, or a point-to-line, or a point to surface, or even some higher correspondence. ¶There exists, then, a point-to-point correspondence between bushels of wheat and loaves of bread, between head of cattle and ponds of meat, between bales of cotton and cotton dresses, between tons of steel and motorcars.  In each case the elements in the standard of living are algebraic functions of the first degree with respect to elements in the productive process….(there is) an inexorable law of limitation. [CWL 15, 23]

Functional Macroeconomic Dynamics is a theory of the interrelations within and between circuits of flows; it bears comparison and contrast of resemblance and difference to other circuits of flows, such as electro- and hydrodynamics.  Macroeconomics is a theory of productive and monetary flows; the theory is constituted by systems of laws formulated mathematically.  As such, its fundamental terms must be precise analytical terms.  The geometer and the physicist cannot build their systems on shifting emotional sands or imprecise definitions. A circle is not a perfectly round curve. It is a planar curve all of whose points are equidistant from the center.  Similarly, Lonergan’s basic terms will be precisely analytical and implicitly define one another by their functional relations of interdependence.  The whole analysis will reach a purely relational macroeconomic field theory.

In Insight” a distinction is made of three types of definition: nominal, explanatory, and implicit.  Nominal definition supposes insight into the use of words.  For example you can nominally define a circle as a perfectly round plane curve, and you can go on to use the word ‘circle’ correctly in the light of that definition.  Again, you can define a straight line as a line that lies evenly between its extremes; and that gives you a good rule for using the words ‘straight line.’ ¶An explanatory definition adds a further element which, if not added in the definition, would have to be added by way of a postulate.  Euclid defined a straight line as a line that lies evenly between its extremes, but he had to add the postulate, All right angles are equal. He defined the circle as the locus of coplanar points equidistant from a center, and consequently he did not have to add the postulate, All radii of the same circle are equal.  You can put your postulates in the definitions or separate from them.  If they are separate, the definitions are merely nominal; if they are in the definition, the definitions are explanatory.¶Finally the postulational element of the explanatory definition can be used alone, and then the definition is implicit.  Implicit definition is of far greater generality  In Hilbert’s Foundations of Geometry, points and straight lines are defined by the postulate, A straight line is determined by two and only two points.. Two points and a straight line are set in correlation; if we have two points, that will determine what we mean by a straight line, and if we have a straight line, that will determine what is meant by a point.  The only thing that is settled is the relation between the two points and a straight line. [CWL 5, 45-46]

Let us say, then, that for every basic insight there is a circle of terms and relations, such that the terms fix the relations, the relations fix the terms, and the insight fixes both.  If one grasps the necessary and sufficient conditions for the perfect roundness of this imagined plane curve, then one grasps not only the circle but also the point, the line, the circumference, the radii, the plane, and equalityAll the concepts tumble out together, because all are needed to express adequately a single insight.  All are coherent, for coherence basically means that all hang together from a single insight.  [CWL 3, 12/36]

Similarly, Lonergan specifies basic elements.

… let the basic stage of the productive process be defined as the aggregate of rates of production of goods and services in process and in a point-to-point correspondence with elements in the emergent standard of living.  As explained in Section 6, goods and services are in process when they are neither the mere potentialities of nature nor on the other hand finished products.  As explained in Section 7, goods and services are in a point-to-point correspondence with elements in the standard of living when they are some determinate, though not immutable or unvarying, algebraic function of the first degree with respect to elements in the standard of living.  Finally, just as the aggregate of rates constituting the emergent standard of living is an aggregate of instances of ‘so much every so often,’ so also is the aggregate of rates of production in the basic stage of the process; and again, as the emergent standard of living, so also the basic stage of the process is an aggregate of rates that are qualitatively and quantitatively variable with respect to successive intervals of time. [CWL 15, 28-29]

The precise analytic distinction between basic (consumer-goods) and surplus (producer-goods) velocitous production functionings – as opposed to a merely descriptive distinction – is current-determinate-point-element-to-current-determinate-point-element  versus current-determinate-point-element-to-future-indeterminate-series of point-elements.  The point-elements are factor-of-production components being assembled at rates into the final composite product which, upon exit-sale, will constitute part of the standard of living.  This distinction between basic and surplus is not descriptive, as in hot vs. cold, or red vs green.  It is a distinction between functional correspondences of point-elements which have velocities of so much or so many per period.  Geometrically, basic versus surplus regards analytical geometric projections: point-to-point and point-to-line.  Analytically, the distinction regards the current, and determinate correspondence, stated in an algebraic function of the first degree (point-to-point), versus the future, indeterminate correspondence of a temporal series back to its point of origin (point-to-series).

Lonergan’s analysis is based upon primitive, primal, primary, and fundamental distinctions which a)virtually contain deductions constituting a superstructure-theory, and thus b) a coherent theory of macroeconomic process.

For the human mind is such that it does not wonder about things just individually but, understanding individual elements, goes on to ask how they are connected with one another. [CWL 12, 17]

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]

Next, understanding is about principles.  A principle is defined as what is first in some order.  Therefore, it belongs to understanding to grasp the solution of that problem that is first in the order proposed by wisdom.  Since this order is such that solving the first means that the others are expeditiously solved, the understanding should be such as virtually to contain in itself the answers to the rest of the questions. [CWL 12, 23]

… the questions are put in such an order that, once the first is solved, the solutions to the others follow with almost no difficulty.  Therefore, because the later solutions are connected to the first as conclusions are connected to some principle, all solutions after the first seem to be the proper province of knowledge. [CWL 12, 25]

… if solving the first problem virtually solves all the others, the concepts and terms in which the first problem and the first solution are defined and expressed cannot be significantly changed if they are to serve to define and express the later problems and solutions.  Clearly, then, it is not the arbitrary malice of professors but the interconnected questions and solutions themselves that demand both systematically formed concepts and a technical terminology that corresponds not to any concepts whatsoever but to systematic concepts. [CWL 12, 25]

The “versus”, highlighted above, signifies a distinction and effects a pure dichotomy, mutual exclusion within but embracing the entire process.

The “versus” also constitutes a mutual or “implicit” definition by functional relation.  The correspondents are either one or the other in a Porphyrean arrangement.  It is an either-or situation.  The point-to-point and point-to-line functions are, first, defined by their relation to elements in the standard of living, and then, by extension defined by a correspondent relation to one another.  The two functions are set in an explanatory correlation to one another. Lonergan took care to establish precise analytical relations upon which to build an explanatory theory.

Point-to-line characterizes the current capital-goods production process.  It is an indeterminate relation to future activities. Capital goods accelerate the productive process of their users.  This so-called “surplus process” is the accelerator process.  The consumer-goods process, which is accelerated as the producers of consumer goods install capital equipment to make their process more efficient and productive, is the accelerated process.  The village fisherman with his dory, oars, thole pins, and single hook and line has been replaced by the commercial fisherman with his large powerboat, wide nets, strong winch and refrigerated storage tanks.  There is more fish for everybody in the village.

As pieces of material equipment, the same objects are initial instances of the idea of capital formation.  Now the history of man’s material progress lies essentially in the expansion of these ideas. … they expedite and accelerate the process of supplying the goods and services that are wanted by consumers. [CWL 3, 207-208/233]

The precise analytic distinction and relation is the rock upon which the superstructure-theory is built.  The terms and relations are alwayscurrent facts in the current, purely dynamic process.  Basic defines, limits, and determines surplus, and surplus defines, limits, and determines basic.

… there is no intelligent conception of terms apart from relations or relations apart from terms, and so there is no possibility of their being apart. [CWL 3, 496/516]

(Lonergan) approaches the focus armed with precise analytic distinctions between basic and surplus activities, outlays, incomes, etc. [CWL 21, xxvi]

(There is) a search for significant basic variables.  For variables, because it is process that is under investigation; for significant variables, because only significance contributes to the relevant acts of understanding; finally for basic[2] variables, because others depend on them, and they depend on one another.  In other words, basic variables form a closed circle, in which terms are fixed by their relations, relations fix the terms, and the whole is justified by the degree in which it and its implications are verified. [CWL 15, 9]

The macroeconomist doing macroeconomic science is not writing a novel; he is doing science with an exigence for a system of laws, i.e. for a unified set of insights expressed in mathematical correspondences and equations which explain the phenomena under investigation.  The symbols and their collocations in the form of the equation represent an isomorphism with the interconnections and interdependencies formally constituting the dynamic productive process.

Thus the need, in the first place, for a precise analytic distinction between the most fundamental, implicitly-defined terms, basic and surplus.  This analytic distinction can then later ground the distinctions between the implicitly-defined, monetary correlates of basic and surplus expenditures termed costs and pure surplus income.

[1]Surplus is an old term from another era.  It does not mean “excess.”  It simply refers to what is not for consumption.  The big fear is that some persons with a psycho-political agenda will twist the meaning and exploit it on camera or on the op-ed page to advance their agenda.

… it is convenient to consider all the other levels of activity as one group, as activities of the surplus level.  I was tempted to name this group simply the plus level, avoiding both a Marxist distraction and an etymological curiosity, but the terminology is Lonergan’s and there seems  no inconvenience in sticking with it.  Should we stick to the terminology and its implied division permanently?  The terminology reaches far before Marx, and the division is relatively permanent in its significance for the understanding and measurement of rhythms of production.  [McShane, 2017, 7]

[2]Here, basic means fundamental rather than basic as distinguished from surplus.