Postulating vs. Explaining in Macroeconomics

Now what, for goodness sake, might the following brief excerpt mean?

For that would be postulating without explaining the boom or slump. [CWL 15, 64]

Might the distinction between merely asserting vs. carefully explaining be critical for today’s academics teaching at universities, consulting on government councils, or working at the Department of Commerce and the Federal Reserve Board?

There are two ways to talk of booms and slumps: The first is simply to describe them in terms of prosperity or misery, i.e. to report a few statistics of increases or decreases in capital expenditures, employment, salary and wage rates, housing prices, debt levels, foreclosures, bankruptcies, whatever. Such merely statistical reporting, devoid of theory and theoretical framework, is merely to postulate the boom or slump, stating and accepting it as something that simply happens without explanation – perhaps surprisingly, by happenstance, mysteriously. As such, and like a postulate (devoid of any explanatory element) in geometry, the report contains no explanation in terms of a theory or is considered to be self evident or even incapable of explanation! Thus we can describe it only in its relation to us as our experience of good times or bad times, without cause, reason, interpretation or explanation by theory.

By ‘n by hard times comes a-knocking at the door

Hard times come again no more.

The other way to talk about booms and slumps is to explain them by the mathematical forms of a tightly-knit coherent theory as distortions, deformations, or divergences from the central tendency implicit in the pure expansionary cycle. This second way gives the scientific reason Why.

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 two are not totally independent, for they deal with the same things and, as we have seen, description supplies, as it were, the tweezers by which we hold things while explanations are being discovered or verified, applied or revised. But despite their intimate connection, it remains that description and explanation envisage things in fundamentally different manners. The relations of things among themselves are, in general, a different field from the relations of things to us. … Not only are description and explanation distinct, but there are two main varieties of description. There are the ordinary descriptions that can be cast in ordinary language. There are also the scientific descriptions for which ordinary language quickly proves inadequate and so is forced to yield its place to a special, technical terminology. (But) both ordinary and scientific description are concerned with things as related to us, but both are not concerned with the same relations 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]

Why? Beformalcause!

The dysfunctional aberrations in both directions are departures from the central and normative tendency provided by theory. Thus the scientific economist refuses to use the colloquial, everyday, non-explanatory terms “boom” and “slump”. Rather, like Hooke with his coiled spring, he finds a formula embracing completely the normative central tendency or equilibrium point of the process, the deviations of the process, and the intensity of the restorative force or the corrective force required in the event of deviations.

The scientist’s language is the language of mathematical differences, first and second order differentials, stresses, and strains. The scientist’s language is technical and explanatory rather than metaphorical and descriptive.

The obvious advantage of explaining rather than postulating or merely reporting the boom or slump is that the explanation specifies precisely the nature and magnitude of the productive or monetary dysfunctioning, the measure of the “distance” from dynamic equilibrium, and the intensity of the restorative force required for the return to dynamic equilibrium.

This dysfunctioning, as a functioning, is effected by the human agents (efficient causes) acting in an economy whose pure or formal cause is the intelligible relations of interdependent velocities and accelerations of functionings in the capital and consumer-goods circuits in the present state of a nation’s skills, technology, resources, culture, and institutions.

In scientific macroeconomic dynamics, one has moved out of the realms of psychology (and the individual psyche’s manifestation in an eruptive and disruptive political ideology) and into the realm of intelligent grasp and explanation. The disputes and debates are transformed from the psychic rant of the wounded sensibility to the intelligent ratio of the objective understander. The theses and antitheses are sublated. Economic activity exhibits a higher probability of being constituted by close cooperation among intelligent people, based on a theory on which all agree. An entirely new systematics would be brought to light in the field of political economy.

Academic economists fail to explain. Why? Because they don’t have an adequate dynamic theory. In the following excerpt, not Lonergan’s explanation. He refers to the Diagram of Interconnected Functions to explain booms and slumps.

… positive or negative transfers to basic demand (D’-s”I’) and consequent similar transfers to surplus demand (D”-s”I”) belong to the theory of booms and slumps. They involve changes in (aggregate basic or aggregate surplus) demand, with entrepreneurs receiving back more (or less) than they paid out in outlay (which includes profits of all kinds). The immediate effect (of these aberrational monetary transfers) is on the price levels at the final markets, and to these changes (in price), enterprise as a whole responds to release an upward (or downward) movement of the whole economy. But the initial increased transfers to demand [that is, excess transfers along (D’-s’I’) and (D”-s”I”) ] are not simply to be supposed. For that would be postulating without explaining the boom or slump. [CWL 15, 64]

A fully explanatory theory of interdependent functional velocities and accelerations distinguishes the intelligible conditions of dynamic equilibrium and disequilibrium, dynamic stability and instability. Thus it provides insight into, understanding of, and explanation of crises

it will be possible to distinguish stable and unstable combinations and sequences of rates in the three main areas and so gain some insight into the long standing recurrence of crises in the modern expanding economy. [CWL 15, 179]

A diagram or image, such as the “baseball diamond” is helpful to achieve a purely relational theory of the economic process.

Lonergan held the diagram to have both explanatory and heuristic significance. First, then, the later versions of the Essay in Circulation Analysis text 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. 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]

Gibbons is implying that the term “monetary function,” used as an abstract explanatory term, does “not resemble very much” a) the aggregates (wages, rent, automobile sales) which first occur to us as corporate accountants or national income accountants, or b) the terms “boom” and “slump” which occur to us as we experience the trade cycle. Through trial and struggle we advance by means of insight into an image to terms at a more adequate level of abstraction, so that we can explain rather than merely postulate or assert.

Notes:

Note 1 re explanatory conjugates: The terms of a theory, which enables us to explain rather than postulate, may sometimes be named “explanatory conjugates.” The word “conjugate” stems from the Latin iugum, meaning the yoke that keeps two oxen together; and the prefix “con” from the Latin cum, meaning with. The idea is that the terms of the explanation are yoked together with each other intrinsically. They mutually determine one another in a system where these terms define the relations and the relations define the terms. Basic defines surplus, and cost defines pure surplus income.

Explanation is knowledge constituted by an expression of terms in relations wherein the terms define the relations and the relations define the terms; e.g. C = πd; PV = nRT; F = ma; F = g (m1m2)/d2.

Thus, masses might be defined as the correlatives implicit in Newton’s law of inverse squares.[1] Then there would be a pattern of relationships constituted by the verified equation; the pattern of relationships would fix the meaning of the pair of coefficients m1, m2; and the meaning so determined would be the meaning of the name, mass. In like manner, heat might be defined implicitly by the first law of thermodynamics[2] and the electric and magnetic fields intensities, E and H, might be regarded as vector quantities defined by Maxwell’s equations for the electromagnetic field.[3] CWL 3, 80/103]

Paraphrasing:

Thus, basic and surplus might be defined as the correlatives implicit in Schumpeter’s connecting capital expansion with booms and slumps. And expenditures and costs might be defined as the correlatives implicit in Lonergan’s observation that what limits so-called profit is macroeconomic costs. Then there would be a pattern of relationships constituted by the verified equation; the pattern of relationships would fix the meaning of basic vs. surplus, and macroeconomic costs vs. pure surplus income.

Note 2 re: reductionism: one cannot apply the explanatory conjugates of subatomic physics or mechanics to the data of another science. One does not explain digestion in terms of muons. Each science is an autonomous science with its own intelligibility and its own terms and relations. Each science preserves the immediately lower science but supersedes it with a new set of terms and relations. To try to reduce all science to that of subatomic particles is called reductionism. “My quarks made me do it!” Similarly, we don’t understand economics in terms of quarks or in terms of mass, space, and time. We seek a set of terms and relations which are proper to and explanatory of the particular field of data being studied. The terms and relations are unique to this particular field of data, in this case the objective economic process.

Note 3 re phantasm (φαντασμα, ατος, το): A diagram is a visual image. In past times, a simple mental representation of a real or supposed object could be called a phantasm. There might be no necessary association with fantasy, ghosts, or delusions. It meant simply an image. So, please be tolerant of our occasional retention of the word phantasm. It is used in the following excerpt. Though somewhat archaic, it is occasionally useful.[4]

Lonergan was grateful for the way Schumpeter had shown slumps and crises were related to contraction of plant and equipment, and that there were ‘a hundred theories’ on why – so that in Schumpeter’s estimation there really existed no solid explanation. Lonergan claimed: ‘I have an explanation on that.’ In addition he said he was grateful to Schumpeter for elucidating the virtualities of Francois Quesnay’s (1694-1774) tableau economique (MD:ECA 53). Lonergan appreciated the way the tableau (1) allowed the theorist (a) to correlate many things all at once, and not just one at a time, piecemeal; (b) to assign numbers arithmetically to the variables involved; (2) permitted insight into phantasm instead of mere speculation detached from the facts. See Joseph A. Schumpeter, History of Economic Analysis 222-23, 241-43. Lonergan’s own use of his five-point diagram indicates just how seriously he took the need for adequate diagrams. See ‘Appendix History of the diagram, 1944-1998’ below, pp 177-202 [CWL 15, Editors’ Introduction, ftnt 86, liii]

 

 

 

[1] F = g (m1m2)/d2

[2] Δ = Δ + Δ

[3] Δ X E = (-1/c)H’

Δ X H = (+1/c)E’

Δ Ÿ H = 0

Δ Ÿ E = 0

 

[4] (See title page of [CWL 3, i/iii] for Lonergan’s epigraph from Aristotle, quoting the Greek word.)