Please refer to the Diagram of Rates of Flow above. 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 Circuits Connected by Operative Crossovers
- The Diagram of Monetary Transfers
- The Diagram of Monetary Channels
- The Diagram of Functional Monetary Dependencies
- The Diagram of Explanatory Operative Functional Flows
- The Diagram of Monetary Correlates
- The Diagram of Implicitly Defining, Mutually Conditioning, Velocitous Functionings
- The Diagram Sublating, Supervening, and Replacing the Single-Circuit Diagram of Macroeconomics Textbooks
- (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 system of laws. The explanatory viewpoint involved is that of a circuit. The monetary flows
Outlays becoming incomes becoming expenditures becoming receipts becoming outlays
are repeated round after round in a circular dependence and, therefore, a circular conditioning. The recurrence of A is conditioned by the occurrence of D.
A to B to C to D to A, etc
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.
In contrast to the circular monetary flows there is 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 in a pattern of rectilinear dependence wherein every step but the first depends on the prior step.
Thus, in contrast to the conditioned rectilinear series of production, there is a conditioned, circular series of money flows.
The circular flows of money meet and enable the rectilinear series in the productive process. In a monetary circuit, current-outlays-becoming-current-incomes are functionally congruent with the productive activities of the production process; and expenditures-becoming-receipts are functionally congruent with vending activities of the production process.
Thus, these money flows, as functionally congruent, are the monetary correlatives of production and vending activities in all steps on all levels of the objective economic process.
The production and sale process is enabled by payments of money. Payment aggregates are flows of so much per period; i.e. they are velocities. Thus an understanding of the structure of the productive process’s making and vending – with which the money-flows are in ratio and temporally congruent – is the key to the understanding of the velocity of money.
An aggregate of productive activities having similar functional correspondences with the elements in the standard of living constitutes a “level” of the hierarchical productive process. One level of the productive process sells “down to” the next lower levelwhich in turn purchases “up from” the higher level. For example, the basic circuit purchases capital goods from the lowest surplus circuit, and the persons in the lowest surplus circuit purchase consumer goods from the basic circuit. Thus money crosses over between the circuit levels.
Levels are in interdependence with one another in the hierarchical process. The circulation of payments on a level constitutes a monetary circuit. The down and up 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; therefore money flows between the basic and surplus circuits as they exchange goods and services with one another.
Thus, the configuration of monetary circulation is a pattern of two circuitsconnected 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.
Prescinding from government and trade imbalances which can mitigate the requirement for crossover balance, for the normative dynamic equilibrium of the entire dynamic process the crossovers must balance. Crossover balance is the condition of 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 expansion of transactions; and the participants in the process, with due allowance for reserves for future use, must neither drain money or goods from their rightful place in another circuit, nor out of the real process altogether 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. His uncovering of a) distinct point-to-point and point-to-line relations between elements in the current productive process and elements in the standard of living, and b) the consequent mutual conditioning of two (or more) differently timed, distinct circuits (in a hierarchy of circuits)constituting a functional relation of interdependence are principal insights into the intelligibility of the real data of functional macroeconomics.
These fundamental insights regarding distinct 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. For from these fundamental postulates a superstructure of theorems and corollaries may be derived to constitute a complete system of laws.
The existence of distinct, interdependent, mutually conditioning circuits with differently-timed surges and plateauings is the basis of superstructural theorems regarding
- a) an ideal pure cycle of product and money flows,
- b) the continuity conditions of the monetary process as a circular keeping pace and a crossover balance between circuits,
And these theorems are stated in formulae which yield 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
into simultaneity of the rectilinear productive steps.