# “Profits” and Costs”

## A.

We wish to speak clearly of the precise analytical, explanatory terms: ordinary surplus income, pure surplus income, and surplus R&M income.

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 (insert) and the electric and magnetic field intensities, E and H, might be regarded as vector quantities defined by Maxwell’s equations of the electromagnetic field.[2][CWl 3, 80/102-3]

Macroeconomic costs are not the same as the corporate income statement’s costs; and macroeconomic profits are not the corporation’s after-tax income. Say what?!

Both utterances “costs” and “profits” have more than one meaning. The scientific macroeconomist and the accountant assign different meanings to these utterances “costs” and “profits.”  Let us distinguish meanings.[3]

In the firm, the accountant’s net profit is the difference between revenues and costs – such as labor, materials, depreciation, utilities, promotion, travel, administration, interest, and taxes.  The method of accounting may be cash or accrual.  In the longer run, this profit is the difference between accounts receivable and accounts payable.  (We need not here go into issues of accounting for dividends, which are viewed as paid out of net profit.)

(Corporate profits) are a simple matter of the excess of accounts receivable over accounts payable. … This accountant’s concept of profit pertains not to macroeconomics but to microeconomics. [CWL 15, 145]

What we have called pure surplus income may also be called macroeconomic profit. It is the income correlate devoted to purely expansionary investment.

For a good visualization of what we are saying, please have at hand the Diagram of Rates of Flow.

Macroeconomic profit, because it is invested in expansion, is not spent on a standard of living.  Therefore it is not a “macroeconomic cost,” which is what limits macroeconomic profit; and therefore, pure surplus income is synonymous with macroeconomic profit.

To avoid confusion, we wish to replace macroeconomic profit with pure surplus income. Pure Surplus Income designates a functional flow and is an explanatory term in an explanatory theory.

… (Pure) surplus income as a macroeconomic concept … results from the functioning of an expanding economy.  [CWL 15, 145]

Alternative designations of macroeconomic profit thus include

• Pure surplus income
• Purely expansionary income
• The monetary correlate of capital expansion
• Net aggregate savings (for investment)
• The social dividend (to be applied wisely to the management of an expanding economy)
• Betterment money

And macroeconomic costs also designates a functional flow and an explanatory term.

Consider Lonergan’s Porphyrean relational postulate of Macroeconomic Functional Costs:

There is a sense in which one may speak of the fraction of basic outlay that moves to basic income as the “costs” of basic production.  It is true that that sense is not at all an accountant’s sense of costs; … For the greater the fraction that basic income is of total income (or total outlay), the less the remainder which constitutes the aggregate possibility of profit.  But what limits profit may be termed costs. CWL 15 156-57

Alternative designations of macroeconomic costs thus include

• What limits macroeconomic profit
• Basic income (to purchase a standard of living)
• Basic Demand (effecting the purchase of a standard of living)
• What is spent on a standard of living, no matter how lavish, rather than saved for investment

The whole structure is relational: one cannot conceive the terms without the relations nor the relations without the terms.  Both terms and relations constitute a basic framework to be filled out, first by the advance of the sciences and, secondly, by full information on concrete situations. [CWL 3, 492/516]   (In addition, the student should read in the entirety CWL 3, 491-6/)

As is evident in the baseball-diamond schematic of rates of functional flows, macroeconomic costs (c’O’ = p’a’Q’) and (c”O” = p”a”Q”) are functional flows.

Let us now introduce two cost price indices, p’ and p”, which are (implicitly) defined by (two of) the equations (in the set of equations explaining the overall economic functioning) [CWL 15, 157]

c’O’ = p’a’Q’               c”O” = p”a”Q”

p’ = c’O’/a’Q’              p” = c”O”/a”Q”

So, pricing are not just given;  they find their intelligibility and explanation as components of an explanation in terms of mutually defining, interdependent functional flows.

These functional flows comprise the basic income for basic purchases constituting the emergence of basic products into a standard of living.  They are the macroeconomic costs of the process and include the costs of repair and maintenance in the basic circuit to provide continuity.

Microeconomic corporate profits are, of course, a goal in the business community, and for good reason.  The manager seeks to have inflows exceed outflows.  He prefers not to go out of business. He seeks to be “successful.”  In the microeconomic business community the nature and purpose of the accountant’s corporate profits is easily understood.

But unfortunately, in the community of academic macroeconomists, the nature of surplus income underpinning expansion of the economy is misunderstood.  Economists have not reached the general laws of the overall economic functioning because they do not have a scientific, explanatory heuristic guiding them to an adequate level of abstraction and generalization.  They put first in the analysis – prices and quantities – what should be last in the analysis.  It is only after analyzing the dynamics of the overall interdependent functional flows with a dynamic heuristic that one can arrive at an adequate scientific account of the dynamic monetary flowings called by us functional macroeconomic costs and functional macroeconomic profits.

McShane brings the perspective and understanding of a mathematician and theoretical physicist to the endeavor.  He insists upon adequate generalization and points out the flaws in the work of Joan Robinson and (Malcolm?) Eatwell.  It is critical that the appreciation of the following excerpt penetrate deeply into the consciousness of the reader.

One might be reminded here of a parallel in hydrodynamics: if what is at issue is a general specification of the dynamics of free water waves, a premature introduction of general boundary conditions or worse, specific channel conditions, botches the analytic possibilities….the Robinson-Eatwell analysis is hampered by their building the (microeconomic) economic priora quoad nos of (corporate) profits, wages, prices, etc., into explanation, when in fact the priora quoad nos[4] (of corporate) profits, wages, prices, etc.) are last in analysis: they require explanation. [McShane, 1980, 124][5]

Corporate profits, wages, and prices are boundary conditions or secondary determinations rather than the integrand expressing the primary relativity and general governing form.

In the integral calculus one has an integrand as a general governing form and a set of initial values or a set of boundary conditions. The form of the integrand may be called the primary relativity.  The sets of initial values and boundary conditions may be called the secondary determinations.

… concrete relations such as equality and similarity lie in the field of descriptive knowledge. … (through) transference (to the explanatory field) it appears that such relations are not simple entities but composite.  They involve a primary component of relativity and a component of secondary determinations.  The primary relativity is inseparable from its base and for that reason all change is change in the base and only incidentally and consequently change in the relativity. … [CWL 3, 495/515-16] [(In addition, read in the entirety CWL 3, 491-6/)

But conjugate forms (such as basic income velocity, ordinary surplus income velocity, and pure surplus income velocity) are defined implicitly by their explanatory and empirically verified relations to one another.  Still, such relations are general laws; they hold in any number of instances; they admit application to the concrete only through the addition of further determinations (such as the coefficients of price and quantity), and such further determinations pertain to a non-systematic manifold.  There is then, a primary relativity that is contained in the general law; it is inseparable from its base in the conjugate form which implicitly it defines; and to reach the concrete relation that holds at a given place and time, it is not enough to think about the general law; one has to add further determinations that are contingent from the very fact that they have to be obtained from a non-systematic manifold. [CWL 3, 492/516 ](In addition, read in the entirety CWL 3, 491-6/)

Lonergan’s orderly analysis starts with the productive process. He has as a goal, rather than as a given, the understanding of the nature of the secondary determinations of prices and profits.  In order to explain the overall functioning of cyclic patterns, and to finally reach an explanation of the nature of prices and profits, he had to describe and characterize different possible types of productive rhythms from which prices and profits receive their precise analytic specification.

But I must note immediately how intimately the ordering is within the perspective: “as the hypothesis is the principle in mathematics so the end is the principle in praxis”. 27  The movement of Lonergan’s analysis might be described as a paradigmatic descent from a concrete heuristic of the productive process determined by the end of that process.  The monetary order is conditioned by, and correlated to, the rhythms of production adequate to the end.  Only later in the analysis can one arrive at an adequate account of the monetary distributions commonly called wages and profits.   That account springs from a characterization of possible types of productive rhythms which lead to the specification of the adequate human adaptation to the demands of the process, and also to a determination of inadequate strategies of adaptation such as variations of interest rates, varieties of taxation and monetary policy.  [McShane 1980,125]

Only by having a premise about the purpose of the process, and only by analyzing the productive and monetary rhythms of the process, and only by discovering the primary relativity of the process, can one come to understand at the end of the analysis the role of prices and profits as secondary determinations to the primary relativity of the interdependent functionings of basic and surplus supply and demand in the overall functioning.

What Sraffa’s work shows, indeed, is that the nature of (corporate) profits is not the central problem of economics: without an analysis such as Lonergan’s, the nature of profitscannot be determined. [McShane 1980,126]

[1]F = gm1m2/d2

[2]ΔX E = (-1/c)H’

Δ X H = (+1/c)E’

Δ H = 0

Δ E = 0

[3]In those instances herein where the meanings of “costs” and “profits” is not clearly defined, the meanings should be clear from the context.

[4]The priora quoad nos– first for us – are the things which we notice first because they are related to our sensitive and perceptive selves, e.g. hot and cold, fast and slow, red and green..  The priora quoad se– first among themselves – are the things or terms which are related to each other, e.g. pressure, volume, temperature; space, time, mass; space time, charge; spacetime and energy, etc.

[5]More fully, the quote is: One might be reminded here of a parallel in hydrodynamics: if what is at issue is a general specification of the dynamics of free water waves, a premature introduction of general boundary conditions or worse, specific channel conditions, botches the analytic possibilities….the Robinson-Eatwell analysis is hampered, not only by an absence of paradigmatic heuristic thinking in a field whose principles involve ends, but also by their building the economic priora quoad nosof profits, wages, prices, etc., into explanation, when in fact the priora quoad nosare last in analysis: they require explanation. McShane, Philip (1980) Lonergan’s Challenge to the University and the Economy, (Washington, D.C.: University Press of America) P. 124[5]