Functions

Diagram of Rates of Flow 2

Diagram of Rates of Flow

[1]We are not doing corporate accounting. We are not doing national income accounting for the U.S. Bureau of Economic Analysis. We are seeking to explain a concrete functioning process, which we call the economic process. We want to explain, rather than describe, the process. So, we seek a general and universal theory, which a) formulates the immanent intelligibility of the process, b) explains in every case either the equilibrium or the disequilibrium of the current process, and, therefore, c) provides norms for the equilibrated operation and control of the overall functioning.

The economic process is a dynamic functioning. It proceeds over time, and so, it is intrinsically dynamic. It is understood as velocitous.

It is a functioning set of interlocking activities. So, we perform a functional analysis of the functioning process. We must identify subfunctionings and their functional interdependencies so as to explain the overall process. Our analysis cannot be in the terms of everyday, non-explanatory accounting categories. Our explanation can only be in terms of interacting, mutually conditioning functionings

While a few economists have noticed and struggled with particular functionings in the economic process, none has been able to discover a unified, explanatory theory and formulate a systematics of the process. Lonergan is alone in formulating and explaining the concrete economic process in terms of functionings.

Lonergan is alone in using this difference in economic activities to specify the significant variables in his dynamic analysis… no one else considers the functional distinctions between different kinds of productive rhythms prior to, and more fundamental than, wealth, value, supply and demand, price levels and patterns, capital and labor, interest and profits, wages, and so forth….only Lonergan analyzes booms and slumps in terms of how their (explanatory) velocities, accelerations, and decelerations are or are not equilibrated in relation to the events, movements, and changes in two distinct monetary circuits of production and exchange as considered both in themselves (with circulatory, sequential dependence) and in relation to each other by means of crossover payments. [CWL 15, Editors’ Introduction, lxii]

Our whole structure is purely relational. A macroeconomic functioning is not a compilation or aggregation of particular income statement categories, such as wages or interest expense. A macroeconomic functioning is implicitly defined by its functional relation to other functionings. The whole structure is purely relational. “Lonergan’s analysis is concrete but heuristic. It focuses on functional relations intrinsic to the productive process to reach eventually a general theory of dynamic equilibria and disequilibria.” [McShane 1980, 117]

An ‘accountant’s unity’: that is a category used in (conventional) accounting. For Lonergan, (conventional) accounting generally denotes an enterprise within common sense which uses descriptive, as contrasted with explanatory terms (on these terms see Insight 37-38/61-62, 178-79/201-3, 247-48/272-73). Insofar as that is true, the accountant’s unity is not an adequate index for the normative, explanatory analysis of the productive process. [CWL 15, 26, ftnt 26]

Functional is for Lonergan a technical term pertaining to the realm of explanation, analysis, theory; … Lonergan (identified) 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” … [CWL 15, 26-27 ftnt 27]

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. Moreover, not only did Lonergan’s terms differ, but he also indicated that these aforementioned terms (of neoclassical and Keynesian economic theory) were permeated, as were the terms of Newton’s theory of gravitation, with descriptive, nonexplanatory residues. Hence, just as a mathematical equation may be said to be the most adequate expression of purely intelligible relations among explanatory terms in certain instances – for example, Einstein’s gravitational field tensor equations – something closely akin to Lonergan’s diagram seems necessary for the realm of dynamic economic functioning. 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]

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]

An objective macroeconomic functioning is not an aggregation of psychological leanings or preferences. As the reader will come to understand, the classical laws of the process are independent of human psychology. The classical laws represent the prior and more fundamental, immanent intelligibility, or formal cause, of the process, whereas the psyche-based activities of humans – outside of the process, as it were – constitute the external efficient cause of the process..

Macroeconomic functionings are technical terms representing concrete flows implicitly defined by the functional relations in which they stand with one another in the overall concrete economic process. The functionings are interdependent flows of classes of products and classes of payments, which condition one another and implicitly define one another. The functionings are the basic technical terms of a set of coherent fundamental equations upon which a superstructure of equations may be based to comprise a complete theory of the workings of this concrete process.

Over and over again McShane endeavors to keep the analyst in a proper orientation by insisting that the analysis a) must be functional, b) regards a concrete process, and c) is heuristically oriented towards the discovery of a dynamic theory.

I have insisted on focusing on the central issue: the need of a functional analysis of the productive process and its correlated monetary flow. [McShane 1980, 200]

Lonergan’s analysis is concrete but heuristic. It focuses on functional relations intrinsic to the productive process to reach eventually a general theory of dynamic equilibria and disequilibria. [McShane 1980, 117]

The division is not a matter of social relations or of property or of the properties of things: it is a functional analysis. … The aim of the analysis is to reveal the possibilities of the productive process as a dynamic system. One moves forward to that revelation in so far as one appreciates the different ways in which basic and surplus stages may relate. [McShane 1980, 119-20]

The analysis is functional and leads us to define five monetary functions which reveal a set of circulations of money. [McShane 1980, 121]

Now whatever the difficulties of measurement, the functional distinction is undeniably valid. [McShane 1980, 121]

the diagram is an aid to separating and understanding functions. The circles are not places, nor are they, say, groups of capitalists, workers, bankers, exporters. … The diagram represents the functional journeys. [McShane 2017, 79]

you begin to glimpse the necessity and the plausibility of the functional analysis for the understanding and guiding of the globe’s economy. [McShane, 2017, 81]

We stick with our simple illustrations … to get you used to thinking in terms of these functional distinctions. [McShane, 2017, 85]

The difficulty here is the absence of the functional classifications, basic and surplus, and the rhythmic ramifications. It is like trying to have a clear view on fire-hazardous chemicals prior to the emergence of the perspectives of Lavoisier and Mendeleev. [McShane, 2017, 87]

Many will still find it difficult to think functionally. (I hope you do not imagine) in terms of suppliers passing money on to buyers who pass money on to some redistributive area. [McShane, 2017, 88]

We deal with functions, not firms or households.

… a massive long-term acceleration is a massive development of surplus activity. Further, one is not to think of this increment in Q” as concentrated in firms of certain types. The distinction between basic and surplus is not a material nor a proprietary but a functional distinction. There are types of enterprise that in themselves are indifferently basic or surplus … [CWL 15, 118]

The analysis must begin with an analysis of the dynamic structure of the productive process. Since the purpose of money is to facilitate the exchange of goods and services, Lonergan first analyzes the structural rhythms of the production of functionally related goods and services. Then the circulation of money is correlated with the structural rhythms of the exchanges of these rhythmic, functional flows of related goods and services.

Functional classification of basic consumption and capital-investment incomes is conceptually different from corporate accounting’s categorization of wages, salaries, rents, royalties and dividends.

no one else considers the functional distinctions between different kinds of productive rhythms prior to, and more fundamental than, … interest and profits, wages, and so forth [CWL 15, Editors’ Introduction, lxii]

(In functional analysis) we are seeking a realistic dynamic view that will hold to the concrete facts and possibilities of economic purpose and progress, that will not slip down the blind alley of general price analysis, … [McShane 2017, xix]

Since our purpose is to explain, rather than merely to describe, the economic process,

the challenge is “understanding economic process in terms of explanatory functions. [McShane 2017, 17]

The distinction (between basic and surplus production) lifts you (out of corporate accounting and) beyond households and firms (of microeconomics), to the challenge of understanding economic process in terms of explanatory functions. [McShane 2017, 17]

We are interested in how the money functions, and that has already been given sufficient meaning by our reflections on classes of payments. The money will function in meeting the flow of basic production or in meeting the flow of surplus production. [McShane 2017, 58]

Analysis for explanation requires a scientific dynamic heuristic. One’s heuristic must guide one towards a dynamic explanation faithfully representing the dynamic concrete process. We must modify or change our mentality. We must adopt a different way of thinking. We must shake our brain out of corporate accounting and its aggregation in National Income Accounting. We are not adding or subtracting a particular account balance; rather we are seeking a general formulation in the differential calculus of the interdependent functional flows.

It is not just the absence of functional distinctions, … It is the entire mentality, the fixity of the descriptive and modeling mentality as opposed to the explanatory and normative perspective at which we aim. [McShane 2017, 62]

Analysis of any complicated dynamic process will require a diagram relating the functional movements.

I would add that the aims and limitations of macroeconomics (that is, the circulation analysis presented here) make the use of a diagram particularly helpful, … For its basic terms are defined by their functional relations. [CWL 15, 54]

We refer to the Diagram of Rates of Flow on the next page. Depending on one’s momentary interest and point of view, this schematic may alternatively be called:

  • The Diagram of Two Operative Circuits Connected by Operative Crossovers
  • The Diagram of Functional Monetary Interdependencies
  • The Diagram of Operative Functional Flows
  • The Diagram of Monetary Transfers
  • The Diagram of Monetary Channels
  • The Diagram of the Monetary Correlates of the Productive Process
  • 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

(This schematic of the channels of the pure cycle prescinds from trade and government deficits and surpluses.)

the diagram is an aid to separating and understanding functions. The circles are not places, nor are they, say, groups of capitalists, workers, bankers, exporters. … The diagram represents the functional journeys. [McShane 2017, 79]

Lonergan’s Diagram of Rates of Flow is universal; it represents the interdependence of functional flows in every closed, dynamic economy. And, upon this fundamental diagram of two functional circuits connected by reciprocally sustaining flows, one may superpose other circuits representing a) government imbalances passing

regularly through the redistribution function, b) the international trade imbalances of an open economy, and c) the aggregate imbalances of, say, a housing bubble.[2] Thus, one can gain understanding of either a closed or open economic process.

Functional macroeconomic dynamics is normative. The general norms are 1) an equilibrium among flows, and 2) a full realization of economic potential. Functional systematics supplies the normative framework to all economies for management of their current process as well as a framework for the revision of the entire history of economics.

you begin to glimpse the necessity and the plausibility of the functional analysis for the understanding and guiding of the globe’s economy. In its fullness it should become the basis of the factual, contrafactual, and proleptic analysis of the twists and turns of economies in history and of the hopes for global economic development. [McShane 2017, 81]

The distinct, but interdependent, concrete functionings of functional macroeconomics are operative but not noticed. They lie beneath the veil of accounting terms; they are not conceived and systematically related as elements which explain the process. They are explanatory, but not generally seen, much less understood as such. Who, prior to reading CWL 15, has come across an explanatory schematic such as the Diagram of Rates of Flow?

Lonergan 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” (See CWL 3, 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

To be sure, a functional economic activity involves human agency. However, the human agents are, as it were, outside the system acting upon an objective mechanism whose explanatory laws are conceptually prior to and independent of the agents’ human psychology.

A study of the mechanics of motor-cars yields premises for a criticism of drivers, precisely because the motor-cars, as distinct from the drivers, have laws of their own which drivers must respect. But if the mechanics of motors included, in a single piece, the anthropology of drivers, criticism could be no more than haphazard.[3] CWL 21, 109

Human agents, as agents outside the objective system, are, therefore, required to honor and adapt to the laws of the mechanism; these laws yield norms for operation of or within the system.

In classifying the functionings by their functional relation to one another, we employ the technique of implicit definition resulting in a dichotomous process such that we comprehend the entire functional process.

A function is implicitly defined by its functional relation to other functions. It may initially be described by words such that one’s understanding and use of the term will be notional or nominal. But the function will ultimately be defined in an equation representing its functional operative relation to other functions.

Thus, while an actual functioning of producing or paying is a concrete activity of our everyday experience, the meaning of the function and its use as interrelational in explanatory formulae is abstract.

Productive functionings are aggregate applications by human beings of factors of production. The humans receive compensation for their productive services.

Monetary functionings are aggregates of purposive movements of money by human beings or units of enterprise for payments. The two aspects of a payment are outflow from one agent equaling receipt by the other agent.

We will specify twelve interdependent classes of payments, variously sortable into six production and six monetary functionings, or into four basic (two production-supply and two monetary-demand), four ordinary surplus (two production-supply and two monetary-demand), and four pure surplus (two production-supply and two monetary-demand) functionings.[4]

We will search for the intelligibility of the functional interrelationships among flows of types of products, and flows among types of payments. This intelligibility will be constituted by the functional relations in which functional flows stand with one another. Thus they will implicitly define one another. The definitions will be discovered, not in Webster, but in equations.

In brief Lonergan is looking for an explanation in which the terms are defined by the relations in which they stand, that is, by a process of implicit definition. This technique (implicit definition) has been used to great effect by David Hilbert in his Foundations of Geometry in which, for example, the meaning of a point and a straight line is fixed by the relation that two, and only two points, determine a line. “The significance of implicit definition is its complete generality. The omission of nominal definition is the omission of a restriction to objects which, in the first instance, one happens to be thinking about. The exclusive use of explanatory or postulational elements concentrates attention upon the set of relationships in which the whole scientific significance is contained.” Michael Gibbons, Economic Theorizing in Lonergan and Keynes p313

No doubt Keynes was an economist first and a methodologist second but he was none the less very articulate about his theorizing……..Lonergan, for his part, is perhaps a methodologist first and an economist second, but, as we shall see, he was able to push his economic reflections further than Keynes because he had a firmer grasp of the essentials of an effective theory. Michael Gibbons

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.   Michael Gibbons, Economic Theorizing in Lonergan and Keynes

An economy functions successfully to the extent that money is present to enable the exchanges to be completed at the interfacings of supply and demand. This means money must flow in concomitance with the flow of goods and services according to the natural rhythms of production of the particular economy. If money does not so flow, the normative exchanges for production and sale are not effected, i.e. production and sale are not completed and the proper continuity is not realized.

Again, while functionings constitute the concrete process, the concept of “function” is an abstraction; i.e. you cannot kick a functional classification itself, nor can you smell it, nor hear it. The concept of “function” is within understanding; it is not a visible, material, aromatic, sounding object. Yet the activities classified as particular functions are concrete everyday activities, and we glean their macroeeconomic meaning right from the start, since we all speak of the “functioning” or “malfunctioning” of the economy.

The economic scientist must avoid falling into the trap of classifying activities according to the constraining pigeon holes – sectors, industries, households, firms, laborers, managers, entrepreneurs, bourgeois, proletariat, rich, poor – into which activities are conventionally grouped by accountants, and ignorant political opportunists. Our interest is in explanatory functional activities, not firms. A particular unit of enterprise may operate in either or both functional circuits. An individual may use his weekly pay to buy string beans for dinner or a computer to run a business out of his garage. GAAP accounting does not provide us with the explanatory functional classifications we need.

Harkening back to Aristotle: The efficient cause of a functioning is the people performing the activities which constitute the function. The final cause of a function is its goal or purpose. The exemplary cause of a functioning is the normative adaptation to be performed as determined by the natural rhythm of the economy in its course to full realization.

The formal cause of the entire process is the immanent intelligibility of the process as a group of interdependent, mutually-conditioning, mutually-defining functionings. The formal cause is a set of coherent equations-relations which fully explain the process. The formal cause is a complete theory providing complete explanation.

So, think functions, not firms; and think functions, not income-statement accounts or changes in balance-sheet accounts. Accounting and scientific explanation are different fields.

 

[1] This website contains two other treatments of functions: Further re Functions, https://functionalmacroeconomics.com/further-re-functions/ and a longer section Functions, Velocities, and the Achievement of Scientific Economics https://functionalmacroeconomics.com/functions-veloci…ntific-economics/. While they obviously must be read separately, it would be beneficial to read them in a single sitting.

[2] by “we” as an aggregate of private individuals, rather than “we the people” collectively in the person of the government

[3] Haphazard means marked by lack of plan, order, or direction (Webster)

[4] See the list of twelve aspects of functions in Further re Functions on this website. https://functionalmacroeconomics.com/further-re-functions/