Circuits, Interdependencies, And Equilibrium

Depending on one’s momentary interest and point of view, the Diagram of Rates of Flow above may be alternatively called:

  • The Diagram of Two Operative  Monetary Circuits Connected by Operative Monetary Crossovers
  • The Diagram of Functional Monetary Interdependencies
  • The Configuration of Monetary Conditions
  • The Diagram of Operative Functional Flows of Products, Payments, and Financings
  • The Diagram of Monetary Channels
  • The Diagram of Monetary Transfers
  • The Diagram of Monetary Circulations
  • The Diagram of the Monetary Correlates of the Productive Activities
  • The Diagram of Interdependent, Implicitly-Defining, Mutually-Conditioning Velocitous Monetary Functionings
  • The Diagram of Explanatory Interconnections
  • The Double-Circuited, Credit-Centered Diagram which Sublates, Supervenes, and Replaces the Single-Circuit, Credit-Centered Diagram of Macroeconomics Textbooks
  • The Functional Framework
  • (Colloquially) The Way the Process Works
  • (Colloquially, because of its shape) Lonergan’s Baseball Diamond

The diagram prescinds from trade imbalances and government deficits and surpluses, which can be treated separately as superposed circuits.  (See CWL 15, 162-176)

A dependency constitutes a conditioning.  The dependency of the occurrence of B upon the occurrence of A constitutes a serial conditioning of B by A.  If A does not occur, then B does not occur.

Money flows.  Like electric current, it moves in a circuit according to a set of laws.  The explanatory viewpoint adopted by Lonergan is that of a circuit. The monetary flows with Outlays becoming  incomes becoming expenditures becoming receipts becoming outlays again.  This circulation is repeated round after round in a circular dependence and, therefore, a circular conditioning: A to B to C to D to A, and so on.  The recurrence of A is conditioned by the occurrence of D.  And the same amount of money can circulate over and over again to effect mounting cumulative values, i.e. multiples of that fixed amount of money.

There is also the rectilinear productive process.  A product or service is built up from raw materials and human applications to a completed state in a rectilinear (not circular) sequence of steps over time .  There is a rectilinear pattern of serial dependencies wherein every step but the first depends on the prior step.

An aggregate of serial applications of factors productive activities having similar functional correspondences with the factors of items exiting the process into the standard of living constitutes a “level” of the hierarchical productive process.  Each level has its own circuit of Outlays, Incomes, expenditures, Receipts.

Also, levels are in interdependence with one another in the hierarchical process. They trade goods and services with one another. Entrepreneurs in the basic circuit purchase repair and expansionary capital from the surplus circuit; and workers in the surplus circuit purchase consumables from the basic circuit.  The up and down functional monetary flows are understood as – and are diagrammed as –  “crossovers” between circuits.

Basic and surplus activities are functionally distinct, yet interdependent.  They form their own basic and surplus circuits, but they are symbiotic as money flows between the basic and surplus circuits and they exchange goods and services with one another.

Thus, the configuration of monetary circulation is a pattern of two circuits connected by crossovers, where circular dependence and circular conditioning is represented by the circuits, and where mutual dependence and crossover conditioning is represented by the connecting crossovers.

The surplus and basic flows will accelerate with different timings as an economy expands, but the general pattern of two circuits continuously connected by crossovers is an invariant.

For continuity within a circuit, the circular flows must keep pace with one another and the flows crossing out must be balanced by the flows crossing in.  The crossovers must balance.  Crossover balance is the condition of continuity and equilibrium in Functional Macroeconomic Dynamics.

Further, for satisfaction of full potential as an economy expands, the Central Bank must put enough money into circulation to enable the expeditious expansion of transactions; and the participants in the process, with due allowance for reserves for future use, must make the crossovers balance and avoid draining money out of the real process into a secondary pool of useless idleness.

Lonergan insisted that the productive process is the current, purely dynamic process.  Since it is the current process, he insisted that we discern the intelligibility of the present facts constituting the current process.  He achieved principal insights into the intelligibility of the real process of functional macroeconomics.  He discovered a) distinct point-to-point and point-to-line relations between factors in the current productive process and the integrations of factors entering as finished products into the standard of living, and b) the consequent mutual conditioning of two (or more) differently timed, distinct circuits (in a hierarchy of circuits).

These fundamental insights into separate but interdependent circuits, crossover correspondence, and lags are of systematic significance.  As such, they are akin to the postulates in a field of science.  For example, plane geometry postulates that a.) two points determine a line and vice versa, and b.) all right angles are equal, and from these fundamental postulates a superstructure of theorems and corollaries may be derived to constitute a complete system.  Similarly, from the postulation of point-to-point and point-to-line relations, accelerator and accelerated (surplus and basic) circuits, circular conditioning, crossover conditioning, and lags between payments and receipts, the process yields norms.  It is a normative theory.  It is a discovery of

  1. a) an ideal pure cycle of product and money flows,
  2. b) the continuity and equilibrium conditions of the monetary process as a keeping pace within circuits and a crossover balance between circuits,

These theorems are stated in formulae which thus provide norms for adaptation by human agents as the process proceeds through the phases of expansion.

Finally, as mentioned, we have prescinded from consideration of government tax-and-spending imbalances and from favorable and unfavorable balances of foreign trade. For an introduction to these topics, which are treated elsewhere on this website, let us simply quote:

There are sets of phenomena, notably the favorable and unfavorable balances of foreign trade, deficit government spending, and the payment of public debts by taxation, that are analogous to the phenomena of the cycle.  It is proposed to deal with them under the general title of ‘superposed circuits.’  CWL 15, 162-63

In our general account of the monetary circulation, two circuits, a basic and a surplus, were distinguished.  They were interconnected with a crossover.  But they involved no regular flow through the Redistributive Function. … There is, however, no impossibility of the Redistributive Function becoming a point through which a circuit regularly passes …  On the other hand, such a circuit both presupposes and is distinct from the basic and surplus circuits already considered.  Hence the name of superposed circuits, and also the mode of treatment.  CWL 15, 162-63

No doubt the additions or subtractions (of the superposed circuits) modify these rates (in the fundamental operative circuits already considered, and) reinforce or counteract the tendencies of whatever phase may be in progress.  Our purpose in representing them as (superposed circuits) is not at all to deny such interaction but rather to gain a viewpoint from which such interaction may be studied.  The viewpoint adopted is that of the circuit. CWL 15, 162-63