### 1. Dynamic Heuristic and Method

A heuristic is a guide to an inquiry. It will state the type of answer to be sought and the method to be used. Lonergan, and we, adopt a scientific and dynamic heuristic

… heuristic structures and canons of method constitute an a priori. They settle in advance the general determinations, not merely of the activities of knowing, but also of the content to be known. [CWL 3, 104-105/128]

In his search for explanatory theory, Lonergan developed a scientific and *dynamic* heuristic guiding his search for general laws that govern and explain the *current*, *purely dynamic, concrete*, *economic process*. It is always the *current* process; it is the process being conducted right now, or in this period. It is a *concrete* process in which we all participate. And it is a process of interrelated, mutually conditioning, *velocitous functionings; *as a velocitous process, it is dynamic. So, Lonergan’s heuristic had to be adequate to the nature of the process in all respects.

The explanation of the dynamic, concrete process must consist of equations which in all instances *completely explain* the behavior of the interrelated, interacting, velocitous functionings. It constitutes a general, universally applicable theory. As scientific rather than descriptive, the whole structure of the formal explanation will be purely relational. The functionings must be implicitly defined by their functional relations to one another. And, since one is investigating a process which occurs over time, the fundamental equations will formulate a *dynamics*; the equations will relate interdependent, mutually defining, *functional velocities and accelerations* to one another in a coherent, unified, and complete explanation.[1]

Method in an empirical science seeks systems of laws, of ideal frequencies, of genetic operators, of dialectical tensions.

(man can) determine in advance certain general attributes of the object under investigation. So the methods of the empirical sciences rest on the anticipation of systems of laws, of ideal frequencies, of genetic operators, of dialectical tensions [CWL 3, 634/657]

As Newton discovered a *deeper* *unity* that **generalized** the isolated insights of Galileo and Kepler, so Lonergan sought to discover a deeper unity that generalized the insights of S.M. Longfield, John Rae, Nassau Senior, Eugen von Böhm-Bawerk, and Piero Sraffa[2]; a *deeper unity* in the relations among economic functionings.

At some point, the scientist comes to realize that he cannot construct a million theories based upon each of millions of particular analyses of particular sets of prices and quantities; he must move to a higher level of abstraction in order to discover the few general laws, which can be applied universally to explain every particular case.

Guided by an heuristic method, Lonergan, like Newton and Einstein and Feynman and countless others, constructed several possibly representational images which he could manipulate. Among these he sought to discover one representing the structure of functional interrelations, so that, by insight, he could finally achieve, first, a set of basic, fundamental, core relations, and, second, a superstructure of further relations which would altogether explain the entire process in its normative configurations and its distorted configurations. These coherent explanatory relations would comprise a *complete theory*. The set of relations would not be a congeries of isolated insights which are not coherently related to one another; rather the set of relations would cohere and comprise a complete theory.

A mere congeries of laws will not suffice. For if one is to operate upon the concrete, one must be able to employ at once several laws. To employ several laws at once, one must know the relations of each law to all the others. But to know many laws, not as a mere congeries of distinct empirical generalizations, but in the network of interrelations of each to all the others, is to reach a system. CWL 3, 76

On such a methodological model (i.e. explanatory definition and implicit definition superseding nominal definition)… classes of payments quickly become rates of payment standing in the mutual conditioning of a circulation; … and from the foregoing dynamic configuration of conditions during a limited interval of time, there is deduced a catalogue of possible types of change in the configuration over a series of intervals. There results a closely knit frame of reference that can envisage any total movement of an economy as a function of variations in rates of payment, and that can define the conditions of desirable movements as well as deduce the causes of breakdowns. Through such a frame of reference one can see and express the mechanism to which classical precepts are only partially adapted; and through it again one can infer the fuller adaptation that has to be attained. [CWL 21, 111]

The Diagram of Rates of Flow is key to understanding functional macroeconomic dynamics. It has heuristic significance. It is a visual pattern of new terms and relations. As a visual image, it aids insight. It makes understanding much easier.

Lonergan held the diagram to have both explanatory and heuristic significance. First, then, the later versions of the

Essay in Circulation Analysistext 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, 179-80]… the diagram can be said to have a heuristic significance. In Lonergan’s usage, ‘heuristic’ denoted the sorts of innovations that expedite the occurrence of certain acts of consciousness, particularly insights. Thus the diagram as itself a visual image can facilitate the occurrence of insights. For example, while the text of Section 13 works out in great detail sets of relations among

terms, the diagram makes it easy to understand that the exchange economy consists of twocircuitsof payments, basic and surplus; that these circuits are mutually and dynamically interdependent; and that these circuits are dependent upon the activities of the redistributive function. [CWL 15, 180]

The double-circuited and credit-centered system actually constitutes an *economic* *mechanism* to which the human agents must adapt.

A study of the mechanics of motor-cars yields premises for a

criticismof 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,criticismcould be no more thanhaphazard.[3] CWL 21, 109… the double-circuited and credit-centered economy is as naturally demanding as any motor engine. [CWL 21, Editor’s Introduction xxvii]

### 2. Generality and Generalization

(With some hesitation, but finally without regret, we have often placed the word “general” and its derivatives in bold type. We are not shouting; we are only emphasizing the crucial ideas of **general**, **generality**, and **generalization** to interested students. We hope the bold type causes students to pause, understand, and reflect.)

The law of cosines: *c ^{2} = a^{2} + b^{2} -2ab(cos C*) is more

**general**than the Pythagorean formula; it contains the Pythagorean Theorem as a mere special case in which the angle

*C*between sides

*a*and

*b*happens to equal 90

^{o }and, therefore, (

*cos C*) happens to equal 0

*.*

[4]Like Newton seeking the **general** form governing the motions of moving bodies, whether the motions be circular orbits, elliptical orbits, pendulum swings, coiled-spring oscillations, or projectile parabolas, and like Einstein seeking the **general** nature of the motion of light in space-time and the intelligibility of gravity in space-time, Lonergan sought a **general** form governing all possible configurations or combinations of functionings in the objective economic process. He sought to discover explanatory terms with which he could formulate the **general** rules **generally** governing all particular combinations of aggregate price-quantity flows.

for science is of the

generaland it is guided not by quantitative considerations but by the selection of significant differences [CWL 21, 58-59]

Consider the depth and breadth of the understanding of physical mechanics and scientific method, which Lonergan brought to macroeconomic method:

Generalizationcomes with Newton, who attacked thegeneraltheory of motion, laid down its pure theory, identified Kepler’s and Galileo’s laws by inventing the calculus, and so found himself in a position to account for any corporeal motion known. Aristotle, Ptolemy, Copernicus, Galilei, and Kepler had all been busy with particular classes of moving bodies. Newton dealt in the same way with all. He did so by turning to a field of greatergenerality, the laws of motion, and by finding a deeper unity in the apparent disparateness of Kepler’s ellipse and Galilei’s time squared. … Similarly the non-Euclidean geometers and Einstein went beyond Euclid and Newton. … The non-Euclideans moved geometry back to premises more remote than Euclid’s axioms, they developed methods of their own quite unlike Euclid’s, and though they did not impugn Euclid’s theorems, neither were they very interested in them; casually and incidentally they turn them up as particular cases in an enlarged and radically different field. … Einstein went beyond Newton by employing the new geometries to make time an independent variable; and as Newton transformed the formulation and interpretation of Kepler’s laws, so Einstein transforms the Newtonian laws of motion. … It is, , a scientificgeneralizationof the old political economy and of modern economics that will yield the new political economy which we need. … Plainly the way out is through a moregeneralfield. [CWL 21, 6-7]

The first chapter of any textbook of differential equations walks the student through the *general** differential equation* governing the dynamics of some system such as a coiled spring, and/or a pendulum, and/or a projectile. The commentary and diagrams lead one to the *insight* by which one understands the differential equation which will **generally** govern all possible particular instances, so that one can then apply

a.) any particular initial conditions of position and linear or angular velocity, or

b.) particular boundary values

to the solution of that **general** differential equation to get the **particular** law of behavior in the **particular** case. The student comes to appreciate quickly that, in any search for the **general** rule, it would be a pointless waste of time to analyze each and every possible combination of **particular** conditions. **Particular** values are of no interest in a **general** specification.[5]

As an example, consider the **general** specification of the motion of a pendulum with a mass suspended from a massless rod and with no air resistance:[6]

*d ^{2}*

*θ/dt*

^{2}+ g sin*θ/L = 0*

The terms of the general formula are the variables: angle (θ), and time (t); and the constants length (L) of the massless rod, and acceleration due to gravity (g). The **particular** values of the initial position or angle, initial velocity, particular length, are not fixed elements of the **general** specification or **general** governing rule. They are merely the values of variables in the particular case. The general specification, i.e. *primary relativity*, remains the **general** governing form, no matter what values these secondary determinations and the constants may happen to have on this or that pendulum in the particular case.

While the a) corporate accountants’ price-quantity unities such as materials, labor, overhead, and interest, and b) anthropological or psychological factors such as the psychology of property, individuals’ varying perception of “utility,” notions of ambition and success, feelings of failure and resentment, and some social relations of some vaguely-defined psycho-political situation may have accounting, political, or sociological import, these unities – as subjective, and as related-to-us – cannot serve as objective explanatory functional terms. They are not abstractions at an adequate level of **generality**. They are not terms explicitly defining one another by the functional relations in which they stand. They cannot serve as systematically-interrelated and explanatory functional flows in an overall functioning process. They cannot be coherently related to one another in a system of coherent equations which constitute a *theory which explains* the **general** dynamics of the objective economic system.

It is imperative that there be a **general** understanding, at an adequate level of abstraction, of the system’s immanent intelligibility, the system’s implicit norms of proper behavior, and thus what adaptation is required for successful operation.

Appreciation of the notion of **generalization** – one of Lonergan’s main goals, as was Newton’s goal and Clerk-Maxwell’s goal – is critical to full appreciation of what Lonergan has accomplished. So, we list several excerpts and thereby point the reader to texts which supply vital context for a full appreciation of the **generalization** that Lonergan sought and achieved.

It is, we believe, a scientific

generalizationof the old political economy and of modern economics that will yield the new political economy which we need. … Plainly the way out is through a moregeneralfield. [CWL 21, 6-7]If idealism can be brought to learn the discipline of logic and of scientific reflection, then it will impose a

generalizationof the exchange economy. To determine the nature of such ageneralizationis the aim of this inquiry … [CWL 21, 36]A

generalizationwill postulate a transformation not only of the old guard and its abuses but also of the reformers and their reforms; it will move to a higher synthesis that eliminates at a stroke both the problem of wages and the complementary problem of trade unions; it will attack at once both the neglect of economic education and the blare of advertisements leading the economically uneducated by the nose; it will give new hope and vigor to local life, and it will undermine the opportunity for peculation[7] corrupting central governments and party politics; it will require the brain trust but it will make the practical economist as familiar a professional figure as the doctor, the lawyer, or the engineer; it will find a new basis both for finance and for foreign trade. The task will be vast, so vast that only the creative imagination of all individuals in all democracies will be able to construct at once the full conception and the full realization of the new order. [CWL 21, 36-37]

Lonergan’s **general** theory is *purely relational*. The student’s appreciation may be heightened by first, arranging Lonergan’s equations as a completely coherent system of pure relations devoid of economic content and, then, filling the mathematical forms with functional macroeconomics’ content. Again,

[8]First, then, the later versions of the

Essay in Circulation Analysistext 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 quations – something closely akin to Lonergan’s (equations and) diagram seems necessary for the realm of dynamic economic functioning. [CWL 15, 179]

Newton *imagined* (apocryphally) an apple falling from a tree; Einstein performed experiments in his *imagination*; other scientists sought and continue to seek insight into *images*; Lonergan messed with *images* representing interdependent functional flows and finally arrived at the “baseball diamond.”

Lonergan held the diagram to have both explanatory and heuristic significance. … 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 inquiry differs radically from traditional economics. He bases his analysis upon the premise of objective production and exchange rather than upon the premise of subjective self-interest or upon the foggy sensations of subjective utility or timing preferences. He prescinds from human psychology to define the objective situation.

our inquiry differs radically from traditional economics, in which the ultimate premises are not production and exchange but rather exchange and self-interest, or later, exchange and a vaguely defined psychological situation. Our aim is to prescind from human psychology (so) that, in the first place, we may define the objective situation with which man has to deal, and, in the second place, define the psychological attitude that has to be adopted if man is to deal successfully with economic problems. Thus something of a Copernican revolution is attempted: instead of taking man as he is or as he may be thought to be and from that deducing what economic phenomena are going to be, we take the exchange process in its greatest

generalityand attempt to deduce the human adaptations necessary for survival. [CWL 21,42- 43]

The theory of the exchange process in its greatest **generality** is independent of human psychology. One errs fatally in attempting to build a theory on the shifting sands of subjective utility and time preference; i.e. “taking man as he is or as he may be thought to be and from that deducing what economic phenomena are going to be.” Lonergan takes the exchange process in its greatest **generality.**

We set out to indicate the existence of an objective mechanical structure of economic activity, of something independent of human psychology, of something to which human psychology must adapt itself if economic activity is not to become a matter of standing in a tub and trying to lift it. [CWL 21, 56]

Lonergan also sought to provide to macroeconomics an intellectual and scientific autonomy so as to make it utterly independent of ethics and uncontaminated by psychopolitics.

Lonergan shared Alfred Marshall’s willingness in his

Principles of Economicsto make economics utterly independent of ethics and politics, insofar as this meant establishing the intellectual autonomy of economic science. [CWL 15, Editors’ Introduction xlii]

Lonergan also wished to preserve human freedom and democracy, i.e. avoid totalitarianism. He sought to enlighten free people rather than to enchain as slaves the participants in the economic process.

We cannot rely on the old political economy; it was democratic but has been found wrong. We cannot rely on the new economics: it is accurate but it can solve problems only be eliminating democracy. What is needed is a new political economy that is free from the mistakes of the old, a democratic economics that can issue practical imperatives to plain men. [CWL 21, 5]

To avoid a *descent into disorder,* which makes fertile ground for the emergence of totalitarian dictators and massive corruption, it is critical that we discover, promulgate, and honor a governing **generalization** yielding us its laws of orderly operation.

In the next excerpts, note the words and phrases “mechanism,” “objective mechanical structure,” and “laws of mechanics.”

Our immediate task is to work out the correlations that exist between the velocity and accelerator rhythms of production and the corresponding rhythms of income and expenditure. The set of such correlations constitutes the mechanical structure, a pattern of laws that stand to economic activity as the laws of mechanics to buildings and machines. [CWL 21, 43 ]

A rigidly egalitarian system belongs to a perfectly egalitarian world; (however,)a world in which men are, in fact, unequal must find a different system. What system? If the idealism is sentiment without intelligence, it is as likely as not to mate with the underground cynicism of the revolutionaries to foist upon us a dictatorship of the proletariat in which the proletariat does not dictate, (or) a dictatorship of the

Herrenvolkin which theVolkobeys theFuhrer. But if that idealism can be brought to learn the discipline of logic and of scientific reflection, then it will impose ageneralizationof the exchange economy. To determine the nature of such ageneralizationis the aim of this inquiry; but at once this is at least evident. The vast forces of human benevolence can no longer be left to tumble down the Niagara of fine sentiments and noble dreams. They have to be assigned a function and harnessed within the exchange system, for in no other way can that system shake off its fictitious fetters to move consistently towards its maximum. [CWL 21, 36]Now the movement from a less to a more

generallevel of thought normally involves not only an enlargement but also a readaptation of the whole existing structure. A more profound viewpoint emerges, and this calls for a readjustment of the lessgeneralcorrelations. [CWL 21, 6]it is only to give an account of enormous facts overlooked by political economy and by specialized economics that this

generalizationis undertaken; and it is only by a new study of facts, more fully grasped because more broadly seen, that ourgeneralconclusions can be made a source of practical applications. [CWL 21, 10]As Newton reached beyond Kepler’s and Galilei’s laws to the profounder unity of the theory of motion, so too must we forget distinctions between production, distribution, and consumption, and reach behind the psychology of property and laws of exchange to form a more basic concept and develop a more

generaltheory. [McShane, 2014, 9 (quoting [CWL 21, 8])]

Krugman, Picketty, and most academics operate “in a pre-scientific world of statistics-layered journalism slim on theoretical content.”

The need (for a system of

generaleconomic dynamics) remains still, and the failure to meet it … leaves Picketty’s work in a pre-scientific world of statistics-layered journalism slim on theoretical content. [McShane 2014, 58]

Without a **general** theory we cannot judge or criticize the past or present. Criticism requires a theoretical basis. And the discovery of a theory of macroeconomic dynamics requires a scientific, dynamic heuristic.

… “competence in judging whether the mercantilists were wise or foolish. That question is answered only by economic theory … nor is the cause of the divergence a difference in factual data but a difference in the principles accepted by the judging mind. Accordingly, if we succeed in working out a

generalizationof economic science, we cannot fail to create simultaneously a new approach to economic history. Such an approach is already a historical synthesis. [CWL 21, 9-10]

McShane insists that we shake our minds loose from “the fixity of the descriptive and modeling mentality as opposed to the explanatory and normative perspective at which we aim”:

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]

For explanation of the current, purely dynamic process the basic terms must be explanatory velocitous functionings, neither the corporate accountants’ descriptive profit-and-loss accounts nor the academic economists’ static balance of psychological concepts.

We are not going to discuss wealth or value, supply and demand, price levels and price patterns, capital and labor, interest and profits, production, distribution, and consumption. Because we are not, it certainly will be objected that our discussion has nothing to do with economic science, for economics is precisely the study of wealth and value, supply and demand, and so on. The answer is as follows. The discussion moves on a more

generalplane to terminate in a moregeneralconclusion. Because thegeneralincludes the particular, ageneralizedeconomics cannot but include the particular economics. [CWL 21, 8]

The analysis is *functional*.

“Functional”is for Lonergan a technical term pertaining to the realm ofexplanation, analysis, theory; Lonergan illustrates his basic meaning of ‘explanation’by referring to D. Hilbert’s method of implicit definition: … In Lonergan’s circulation analysis, the basic (dynamical) terms are rates (implicitly defined by their functional relations to one another) – rates of mutually conditioning, and interdependent productive activities and rates of mutually conditioning, and interdependent payments. The objective of analysis is to discover the … functional (inter)relationships (which implicitly define these rates and explain the dynamics of these rates to one another). [CWL 15, 26-27 ftnt 27][9]

Lonergan stood alone in achieving a scientific **generalization**..

To our knowledge, no one else considers the

functionaldistinctions between different kinds of productive rhythms (emanating from the distinctions between basic and surplus and their order of timings)prior to, andmore fundamental than, wealth, value, supply and demand, price levels and patterns, capital and labor, interest and profits, wages, and so forth … [CWL 15, Editors’ Introduction lxii]

Next, an outline of functional macroeconomic dynamics’ procedure, insights, discoveries, and results including the discovery of a *mechanism*. As always, it would be helpful to have at hand the double-circuited, credit-centered Diagram of Rates of Flow (the “baseball diamond”).

On such a methodological model (i.e. explanatory definition and implicit definition superseding nominal definition)… classes of payments quickly become rates of payment standing in the mutual conditioning of a circulation; to this mutual and, so to speak, internal (monetary) conditioning there is added the external (monetary) conditioning that arises out of transfers of money from one circulation to another; in turn this twofold conditioning in the monetary order is correlated with the conditioning constituted (in the hierarchical productive order) by productive (and sequential) rhythms of goods and services;[10] and from the foregoing dynamic configuration of conditions during a limited interval of time, there is deduced a catalogue of possible types of change in the configuration over a series of intervals. There results a closely knit frame of reference that can envisage any total movement of an economy as a function of variations in rates of payment, and that can define the conditions of desirable movements as well as deduce the causes of breakdowns. Through such a frame of reference one can see and express the mechanism to which classical precepts are only partially adapted; and through it again one can infer the fuller adaptation that has to be attained. [CWL 21, 111]

We humans are, as it were, “external agents;” we are efficient causes outside the system; we are “not an internal factor.” Academic economists fail to understand this. They build theories upon human feelings, expectations, and agencies. They do not seek a science independent of human psychology. They do not discover a system to whose laws we must adapt.

It is the viewpoint of the present inquiry that, besides the pricing system, there exists another economic mechanism, that relative to this system man is not an internal factor but an external agent, and that the present economic problems are peculiarly baffling because man as external agent has not the systematic guidance he needs to operate successfully the machine he controls. [CWL 21, 109]

“The way out” of the morasses of psyche-based macroeconomics and pricing-system macroeconomics is through a higher level of **generality**, a higher level of abstraction. We need a more **general** field of **general** laws independent of human psychology, upon which all can agree.

economics corrected political economy in the wrong way, … not by moving to the more

generalfield and so effecting the correction without losing the democratic spirit of the old movement, but by staying on the same level ofgeneralityand by making up for lost ground by going into the more particular fields of statistics, history, and a more refined analysis of psychological motivation and of the investigation of decisions to exchange. ¶Plainly the way out is through the moregeneralfield. [Lambert and McShane, 2010, 102-3]

McShane comments regarding Picketty’s and others’ lack of a general theory – their core premises and principles are either nonexistent or a fundamental mess – and their thus dog-paddling in the quicksand of non-explanatory and statistically-infested journalism. Layers and layers of statistics do not constitute explanation and do not a theory make.

I would note that I am on the edge of identifying accurately, in the fullness of a new heuristic of omnidisciplinary scientific inquiry, the fundamental mess in Picketty’s work, as well as in a whole plethora of authors engaged with issues of income inequality. The mess consists in the use of flawed characterizations in selecting and ordering data. … It is like a physicist searching data for traces of the Higgs particle without eyes laden with the standard model. [McShane, 2014, 62]

Today, for instance, I heard Paul Krugman speak of Picketty … as giving rise to a “unified field theory.”[11] Wow! LOL: as I listened, I could not but think of what I had written below, on the next page here: “their efforts do not escape the category of statistically-infested journalism.” [McShane, 2014, 65 ftnt 99]

Galbraith and his collaborators are in the same plight as Piketty and his collaborators. [McShane, 2014, 66]

The interdependent functional flows of income are not “beyond the reach of scientific inquiry,” as Picketty would have it. On the contrary, the functional flows of incomes can be dug out of National Income and Products Accounts (NIPA) and Flow of Funds (FOF) data and are integral to the scientific inquiry constituting *functional analysis*.[12] However, Picketty and others fail to grasp the science of income circulations meeting the products flows as detailed in CWL 15, *Macroeconomic Dynamics: An Essay in Circulation Analysis*. And, not understanding the scientific intelligibility, they lack a clear set of norms to guide the adjustments of flows of types of incomes.

the flow of income in a functional analysis … requires somewhat more attention: it is the corner of the analysis which holds the key to the sublation both of Keynes’ problems of consumption, savings and investments, and of Kalecki’s dictum that the workers spend what they get and the capitalists get what they spend. [McShane, 1980, 120]

The key to the trouble appears best in a sentence … that is not (Picketty’s) own. “As long as the incomes of various classes of contemporary society remain beyond the reach of scientific inquiry, there can be no hope of producing a useful economic and social history.” [McShane 2014, 67-68] (Picketty is quoting from the beginning of

le Mouvement du profit en France au 19e siècle, …)

Again, we continue to emphasize the need for the *sine qua non* of **generalization**. In the following excerpts Lonergan states his goal of *generalization,* gives an indication of what he will analyze, and states his goal of discovering what constitutes continuity and dynamic equilibrium in the objective dynamic economic process. (for “primary” substitute “basic-goods”, and for “secondary” substitute “producer-goods”; let traders include manufacturers, distributors, and retailers)

To study the exchange equilibrium it is necessary to introduce a system of reference, a method of listing the different funds or accumulations that are standing in equilibrium. … Such a system may be of any degree of

generality. The absolute minimum ofgeneralitywould be to list (every one of) the individual persons, firms, banking institutions, etc. that possessed funds. Such a procedure would be very thorough, but it would not be science, for science is of thegeneraland it is guided not by quantitative considerations but by the selection of significant differences. … Let us define a balance as a sum of money or credit held in view of some definite purpose or indefinite eventuality. Then, from the viewpoint of our analysis, there exist five types, and so five aggregates, of balances. … First there areredistributional balances(such as) the reserves assuring the liquidity of banks, insurance companies, underwriters, dealers in stocks and bonds, and the accumulations for the purchase of land, used capital equipment, and secondhand products such as houses, used motorcars, and the like. … Second and third, there are trader balances … to bridge the gap between the initiation of his turnover and its completion: he has to purchase materials, pay wages, and it is only when he has sold his product that the monetary return of his outlay begins. To bridge this gap he must have circulating capital. (Thus we have)primary trader balances and secondary trader balances. Fourth and fifth there areprimary consumer balancesandsecondary consumer balances. On the principle of equilibrium, defined in the preceding section, there must be in thegeneralcase an equilibrium between movements into each of these and movements out to all the others. See at once the diagram p. 64 [CWL 21, 58-59]Now the

generaltheorem of continuity is that this (organic whole) has a nature that must be respected. … to violate this organic interconnection is simply to smash the organism, to create the paradoxical situation of starvation in the midst of plenty, of workers eager for work and capable of finding none, of investors looking for opportunities to invest and being given no outlet, and of everyone’s inability to do what he wishes to do being the cause of everyone’s inability to remedy the situation. Such is disorganization. Continuity, on the other hand, is the maintenance of organization, the stability of the sets and patterns of dynamic relationships that constitute economic well-being in a society. [CWL 21, 74]

In his search for a **generalization** of the concrete process, Lonergan understood clearly that money is a facilitating instrument, not a commodity whose only purpose is to be hoarded. Money is for buying the constituent goods and services of the process of production and sale. Money is to facilitate exchange. Money must circulate in order to “be there” for the exchange of goods and services. Money must “flow.”

“real analysis (is) identifying money with what money buys. … And that is the source of the problem in real analysis. If you want to treat money that doesn’t make a difference, you can have a beautiful liberal monetary theory. But it doesn’t say the way the thing works.” [CWL 21,

Editor’sIntroductionxxviii quoting Lonergan]money is an instrument invented to fulfill a definite task; it is not the ultimate master of the situation. One has to place first human society which is served by the economic process, and second the economic process which is to be served by money. Accordingly money has to conform to the objective exigencies of the economic process, and not vice versa. [CWL 21, 101]

Finally, let us acknowledge and appreciate that Lonergan brought to his search for generalization and scientific explanation in macroeconomic dynamics a vast background in mathematics, scientific method, and the systematics of systems such as mechanics, electromagnetics, thermodynamics, fluid dynamics, chemistry, and geometry. As was said in the beginning of this topic, Lonergan had a mathematico-scientific heuristic. For example, he understood the counting numbers by their form as a progression rather than by their use in tallying.

The method of circulation analysis resembles more the method of arithmetic than the method of botany. It involves a minimum of description and classification, a maximum of interconnections and functional relations. Perforce, some description and classification are necessary; but they are highly selective, and they contain the apparent arbitrariness inherent in all analysis. For analytic thinking uses classes based on similarity only as a springboard to reach terms defined by the correlations in which they stand. To take the arithmetic illustration, only a few of the integral numbers in the indefinite number series are classes derived from descriptive similarity; by definition, the whole series is a progression in which each successive term is a function of its predecessor. It is this procedure that gives arithmetic its endless possibilities of accurate deduction; and, as has been well argued, it is an essentially analogous procedure that underlies all effective theory. [CWL 21, 111]

And the technique of implicit definition yielded terms defined by their functional relations to one another in a process of circulation.

On such a methodological model (i.e. implicit definition)…Classes of payments quickly become rates of payment standing in the mutual conditioning of a circulation; to this mutual and, so to speak, internal (monetary) conditioning there is added the external (monetary) conditioning that arises out of transfers of money from one circulation to another; in turn this twofold conditioning

in the monetary orderis correlated with the conditioning constituted (in the hierarchical productive order) by productive rhythms of goods and services; and from the foregoing dynamic configuration of conditions during a limited interval of time, there is deduced a catalogue of possible types of change in the configuration over a series of intervals. There results a closely knit frame of reference that can envisage any total movement of an economy as a function of variations in rates of payment, and that can define the conditions of desirable movements as well as deduce the causes of breakdowns. Through such a frame of reference one can see and express the mechanism to which classical precepts are only partially adapted; and through it again one can infer the fuller adaptation that has to be attained. [CWL 21, 111]

### 3. Systems and Systematic Significance:

In scientific macroeconomic dynamics we employ the technique of implicit definition and we seek to grasp and formulate a core cluster of explanatory terms and relations. This core set of terms-in-relation will virtually contain a derivable superstructure of relations. These foundational relations are the basis of the system and, thus, are said to be of *systematic significance. *They are the foundation of the entire system.

The *relation* resulting from the distinction of *current*-determinate-point-to-*current*-determinate-point correspondence (basic) vs. *current*-determinate-point-to-future-indeterminate-series correspondence (surplus) is the fundamental *relation* of the *current* dynamic productive system. Upon this relation two differently timed but interrelated circuits are identified and the entire set of equations of *functional macroeconomic dynamics* is constructed. That *projective-geometrical relation* or correspondence between basic and surplus functionings is, thus, said to be of *systematic significance*. With a proper consideration of time, it is formulated as *the* *lagged technical accelerator*.

* k _{n}[f’_{n}(t-a)-B_{n}] = f”_{n-1}(t) – A_{n-1}*

**[13]**So, in analysis in macroeconomics, one initially seeks precise analytical terms defined by the functional relations in which they stand; by means of these terms-in-relation one can define the mechanical[14] structure of the production process and its conditions for continuity and equilibrium; then one correlates and projects this dynamical structure with the correlated dynamic flow of payments which enable and effect the process of production and exchange; then one deduces ideal cyclic cooperation between the two circuits for equilibrium and continuity. At the end of the analysis one has explained booms, slumps, stagflations, and breakdowns of any sort in precise mathematical form. Thus, booms, slumps, stagflations, and breakdowns of any sort are not simply to be supposed or postulated; rather they are to be explained as divergences from the ideal, normative continuity and equilibrium specified and prescribed by the theory.

In the surplus expansion, basic capacity has not yet been expanded, but initially the fraction R is increasing, dR and its coefficient a’’ are both positive, da’’ is initially positive to expand the basic price spread and induce speculators in the production series to stock up on materials, semi-finished goods, and finished goods. The flow of surplus outlays crossing over into the basic circuit combines with the flow of money in the basic circuit to outstrip the flow of goods available in the basic circuit. The flow of money is disproportionate to the flow of goods. [CWL 15, 160-61]

The main analytic apparatus is now complete. The two acceleration systems have been defined: a circulatory system consisting of two connected circuits that are accelerated by an external redistribution function; a quantity system of two parts in which one part is the long-term accelerator of the other. In each of these acceleration systems … an inner logic or ground in the nature of things indicates the normative or pure cycle of the quantity process. Finally, indices of price increments serve as markers of the divergence between the two systems. [CWL 21, 134]

In our scrutiny of economic journalists, we must understand that their statistically-laden journalism regarding, say, the Great Depression or the Great Recession does not constitute an explanation. One does not explain the **mechanical system** by the statistics of its operation; rather one explains the mechanical system by its laws of mechanical operation to which the agents – human persons – must adapt.

The **system** of laws is a theoretical framework.

A systematic explanation, then, requires a normative theoretical framework. The basic terms and relations of such a framework would specify the distinctions and correlations that articulate the causes, which are not necessarily visible, of events that are apparent to all. [CWL 15, Editors’ Introduction, lv]

One does not teach the science of automobile velocity with statistics of speeding tickets. One explains it as the second derivative of a continuous function of distance and time. Similarly, one does not explain the economic system with loads of statistics of increases and decreases, prosperity and hardship. One explains it by formulating its explanatory relationships, its mechanical structure, its theoretical framework, its normative functioning, and its distortions and divergences from its norms.

The framework would thus stand to the ordinary apprehension of the booms and slumps of the trade cycle in much the same way that the explanatory grasp of acceleration as the second derivative of a continuous function of distance and time stands to the ordinary, commonsense grasp of what it is to be going faster. [CWL 15, lv]

Our immediate task is to work out the correlations that exist between the velocity and accelerator rhythms of production and the corresponding rhythms of income and expenditure. The set of such correlations constitutes the mechanical structure, a pattern of laws that stand to economic activity as the laws of mechanics to buildings and machines. [CWL 21, 43]

Rather than mysteries celebrated as booms or lamented as slumps or stagflations, the deformations are precisely explained by the divergence of their flows from the normative central tendency; also, the nature and extent of the systematically necessary correction of the boom or slump or stagflation is fully explained rather than considered an impenetrable mystery, yet addressed anyway by messing with the money supply and interest rates rather than adjusting the flows.

In the end of any scientific analysis one has reached a “**system**” constituted fundamentally by terms-in-relations. Functional macroeconomic dynamics is a cluster of insights related so as to constitute a coherent system of complete explanation. The cluster taken altogether constitutes a single explanatory unity. The whole thing holds together. *Everything* *coheres* in the **system**.

We have to note that a system is quite an achievement; systems are not numerous. There are Euclid’s geometry and subsequent developments in geometry, Newton’s mechanics and dynamics and the building upon Newton, and the Mendeleev table in chemistry. System then is the expression of a cluster of insights. [CWL 5, 52]

Newton set down laws of motion and proceeded to demonstrate that if a body moves in a field of central force, its trajectory is a conic section. He set out with a minimal cluster of insights, definitions, postulates, axioms and proceeded to account for the laws that had previously been empirically established, bringing them into a single explanatory unity. ¶A single insight yields a conception, a definition, an object of thought; but from a cluster of insights, you build up a

systemof definitions, axioms, postulates, and deductions. We have to note that asystemis quite an achievement;systemsare not numerous. [CWL 5, 52]Let us move on to the notion of

system. … in Euclid we do not simply have stray insights … What we have is a fundamental cluster of related insights and a set of definitions, axioms, and postulates from which follow solutions to problems. The whole thing holds together. [CWL 5, 52]Lonergan agreed with Schumpeter on the importance of

systematicor analytic framework in order to explain, rather than merely record or describe, the aggregate phenomena of macroeconomics; he agreed with Schumpeter that to be able to explain the booms, slumps, and crashes of the trade or business cycles the economist’s analysis had to be as dynamic as the subject matter under investigation; and he agreed that the economist had to know what are the significant variables in the light of which price changes are to be interpreted. According to Lonergan, standard economic theory had successfully achieved none of these desiderata. [CWL 15, Editors’ Introduction liii]

The term “*of* *systematic significance”* is attributed to *foundational* or *core* terms-in-relation **virtually containing** a superstructure of derived relations, all of which constitute an explanatory theory or *system*.

In macroeconomic dynamics, the epithetic phrase *scientific* *significance* is attributed to the core formalisms (equations) consisting of explanatory terms related to another by the functional relations in which they stand to one another. The core equations plus the equations that can be deduced from them explain the system scientifically. That is, they constitute the *theory of macroeconomic dynamics*.

### 4. Plain Precepts for Free People

Lonergan sought to make economics utterly independent of ethics and uncontaminated by politics, so that ethical precepts could be based on or grounded in the economy itself.

Lonergan shared Alfred Marshall’s willingness in his

Principles of Economicsto make economics utterly independent of ethics and politics, insofar as this meant establishing the intellectual autonomy of economic science. [CWL 15, Editors’ Introduction xlii]This gap between well-intentioned moral demands and economic exigencies prompted Lonergan to inquire how economic moral precepts could be based on or grounded in the economy itself. [CWL 15, Editors’ Introduction xxviii]

Lonergan also wished to preserve human freedom and democracy, i.e. avoid strangulating totalitarianism with its pogroms and corruption. He sought to enlighten free people rather than to enchain as slaves the participants in the economic process.

A rigidly egalitarian system belongs to a perfectly egalitarian world; (but) a world in which men are, in fact, unequal must find a different system. What system? If the idealism is sentiment without intelligence, it is as likely as not to mate with the underground cynicism of the revolutionaries to foist upon us a dictatorship of the proletariat in which the proletariat does not dictate, a dictatorship of the

Herrenvolkin which theVolkobeys theFuhrer. But if that idealism can be brought to learn the discipline of logic and of scientific reflection, then it will impose a generalization of the exchange economy. To determine the nature of such a generalization is the aim of this inquiry; but at once this is at least evident. The vast forces of human benevolence can no longer be left to tumble down the Niagara of fine sentiments and noble dreams. They have to be assigned a function and harnessed within the exchange system, for in no other way can that system shake off its fictitious fetters to move consistently towards its maximum. [CWL 21, 36]We cannot rely on the old political economy; it was democratic but has been found wrong. We cannot rely on the new economics: it is accurate but it can solve problems only be eliminating democracy. What is needed is a new political economy that is free from the mistakes of the old, a democratic economics that can issue practical imperatives to plain men. [CWL 21, 5]

To avoid a descent into disorder which gives rise to totalitarian dictators, it is critical that we have a **scientific** **generalization **of both the old political economy and the recent neoclassical and Keynesian economics – on which all can agree**. ** We seek to bring all participants – academics, journalists, politicians, analysts in all fields, and, in short, everyone – to understand the macroeconomic mechanism yielding us its laws of orderly operation. That mechanism is functional macroeconomic dynamics.

It is, we believe, a scientific

generalizationof the old political economy and of modern economics that will yield the new political economy which we need. … Plainly the way out is through a moregeneralfield. [CWL 21, 6-7]

** **

[1] CWL 3, 642/

[2] CWL 15, Editors’ Introduction lxii

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

[4] (Though this is a subsection in what is called “A Short Introduction to Selected Key Notions,” it consists of several pages in order to provide an adequate appreciation of Lonergan’s intellectual background, aim and achievement.)

[5] Complementary to this treatment of generalization is our treatment of a) classical and statistical laws, and b) primary relativity and secondary determinations. See on this website the section Prediction and Control; The Ideal Pure Cycle and Probabilistic Indeterminacy

[6] Fred Brauer and John A. Nohel, *Ordinary Differential Equations*, 1967, W. A. Benjamin, Inc; New York, pp. 7-11

[7] embezzlement

[8] The next two excerpts have been cut, rearranged, and pasted out of the excerpt given previously, but repeated here again – unsplit – in this footnote for the reader’s convenience.

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 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

[9] I have rearranged the quote. The original wording is as follows:

**“Functional”** is for Lonergan a technical term pertaining to the realm of **explanation**, analysis, theory; ¶Lonergan illustrates his basic meaning of ‘**explanation’** by referring to D. Hilbert’s method of implicit definition: … In Lonergan’s circulation analysis, the basic terms are rates – rates of productive activities and rates of payments. The objective of analysis is to discover the underlying, intelligible and indeed dynamic (accelerative) network of **functional**, mutually conditioning, and interdependent relationships of these rates to one another. CWL 15 26-26 ftnt 27[9]

[10] … In figure 14-1 the reader will notice five circles representing the monetary functions. … I would add that the aims and limitations of macroeconomics (that is, the macroeconomic circulations presented here) make the use of a diagram particularly helpful, … For its basic terms are defined by their functional relations. The maintaining of a *standard of living* is attributed to a *basic process* (distinct process 1), an ongoing sequence of instances of *so much every so often*. The *maintenance* and *acceleration* (positive or negative) (distinct process 2) of this basic process is brought about by a sequence of surplus stages, in which *each lower stage* is maintained and accelerated by the *next higher*. Finally, transactions that do no more than transfer titles to ownership are concentrated in a *redistributive* *function*, whence may be derived changes (distinct process 3) in the stock of money dictated by the acceleration (positive or negative) in the basic and surplus stages of the process. … So there is to be discerned a threefold process in which a basic stage is maintained and accelerated by a series of surplus stages, while the needed additions to or subtractions from the stock of money in these processes is derived from the redistributive area. … 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, 53-54

[11] A video recording is available on You Tube at https://www.youtube.com/watch?v=heOVJM2JZxI

[12] See on this website the section Revision of NIPA’s

[13] CWL 15, 36-7

[14] By “mechanical” we mean having to do with the science of motion. Note that Newton’s three laws of motion plus his inverse squares law plus the deduced superstructure of principles of work, kinetic and potential energy, etc are grouped under the heading “mechanics.” By “mechanical” we do not mean rigidly “mechanistic” like the simplest piece of metal machinery.