Practical Precepts for Free People – Consumers, Entrepreneurs, Bankers, Investors

On ensuing pages we list precepts mandated by a non-political, scientific Functional Macroeconomic Dynamics. The precepts are practical precepts for free people.  Prior to that list we cite several passages used as the basis for the precepts.

Clearly schemes of recurrence exist and function.  No less clearly, their functioning is not inevitable.  A population can decline, dwindle, vanish. A vast technological expansion, robbed of its technicians, would become a monument more intricate but no more useful than the pyramids.  An economy can falter, though resources and capital equipment abound, though skill cries for its opportunity and desire for skill’s product, though labour asks for work and industry is eager to employ it; then one can prime the pumps and make X occur; but because the schemes are not functioning properly, X fails to recur.  As the economy, so too the polity can fall apart. …in a twilight of straitened but gracious living men await the catalytic trifle that will reveal to a surprised world the end of a once brilliant day. [CWL 3, 209-210/235]

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 first difficulty is psychological.  The static phase is a sombre world for men brought up on the strong drink of expansion. They have to be cured of their appetite for making more and more money that they may have more money to invest and so make more money and have more money to invest.  They have to be fitted out with a mentality that will aim at and with a going concern and a standard of living.  It is not so easy to effect this change, for as the Wise Man saith, the number of fools is infinite. [CWL 21, 97-98]

We set out in this chapter 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]

The old political economists were champions of democracy; and if the content of their thought has been found inadequate, its democratic form is as valid today as ever.  That form consisted in the discovery of an economic mechanism and in the deduction of rules to guide men in the use of the economic machine, a rule of laissez faire for governments and a rule of thrift and enterprise for individuals … but it is still insufficiently grasped that new and more satisfactory rules have to be devised.  Without them human liberty will perish.  For either men learn rules to guide them individually in the use of the economic machine, or else they surrender their liberty to be ruled along with the machine and a central planning board …the one issue is the locus of control.  Is it to be absolutist from above downwards?  Is it to be democratic only in the measure in which economic science succeeds in uttering not counsel to rulers but precepts to mankind, not specific remedies and plans to increase the power of bureaucracies, but universal laws which men themselves administrate in the personal conduct of their lives. [?]

A surplus expansion calls for saving, and a massive surplus expansion calls for massive saving.  In contrast, the basic expansion calls for ever-increasing consumption.  So the practical wisdom cherished in the surplus expansion (save and invest) has to give way to a quite different practical wisdom (employ for consumption) in the basic expansion. … Now to change one’s standard of living in any notable fashion is to live in a different fashion. It presupposes a grasp of new ideas. If the ideas are to be above the level of currently successful advertising, serious education must be undertaken.  Finally, coming to grasp what serious education really is and, nonetheless, coming to accept that challenge constitutes the greatest challenge to the modern economy. [CWL 15, 119]

Lonergan found seriously wanting, as universally valid advice, the policy of laissez faire for government … and thrift and enterprise for individuals.  For Lonergan this policy was based on assumptions of equilibrium theory that did not integrate a grasp of diverse and highly contingent equilibria appropriate to different phases of an expanding economy.  …  As Lonergan expressed repeatedly, thrift and enterprise are the correct behavior when an economy is undergoing the vast widening and deepening of capital formation. As soon as capital formation levels off, and a new phase of widening and deepening the standard of living ought to begin, raising workers’ wages and extension of their credit balances, for instance, might be more responsible courses of action than thrift and enterprise. … [CWL 15, Editors’ Introduction xlvii-viii]

A condition of circuit acceleration was seen … to include the keeping in step of basic outlay, basic income, and basic expenditure, and on the other hand, the keeping in step of surplus outlay, surplus income, and surplus expenditure.  Any of these rates may begin to vary independently of the others, and adjustment of the others may lag.  But any systematic divergence[1] brings automatic correctives to work.  The concomitance of outlay and expenditure follows from the interaction of supply and demand.  The concomitance of income with outlay and expenditure is identical with the adjustment of the rate of saving to the requirements of the productive process. [CWL 15, 144]

The idea of engineering human welfare is repugnant to Lonergan, for ‘managing people is not treating them as persons. To treat them as persons one must know and one must invite them to know.’  Making the survival of democracy possible by ‘effectively augmenting the enlightenment of … enlightened self-interest’ cannot be identified merely with the Enlightenment’s project of steering public opinion from unenlightened to enlightened self-interest.  Instead, Lonergan envisaged a vast and long-term educational effort.  He insisted that rational control of the economy can be democratic only in the measure in which economic science succeeds in uttering not counsel to rulers but precepts to mankind, not specific remedies and plans to increase the power of bureaucracies, but universal laws which men themselves administrate in the personal conduct of their lives.’ [CWL 15, Editors’ Introduction lxxi]

It calls forth some economic system, some procedure that sets the balance between production of consumer goods and new capital formation, some method that settles what quantities of what goods and services are to be supplied, some device for assigning tasks to individuals and for distributing among them the common product. [CWL 3, 208/234]

The profit motive works very well in a capitalist phase when the surplus ratio is increasing; it works less and less well in the (basic expansion) phase when the surplus ratio is decreasing; it has no leverage at all in the static phase when the surplus ratio is zero; and it works less well in each successive stage or cycle of economic development. [CWL 21, 56]

The Industrial Revolution brought forth the precepts of thrift and enterprise; thrift so that money would not be spent at the primary final market but accumulated for the secondary final market; enterprise so that it would not merely be accumulated but also spent by investment. … unless the (basic expansion) phase is guided by the principles of higher and higher wages and is aided by the consumer credits of installment buying, then the (basic expansion) phase remains a mere pipe dream. [CWL 21, 67-68]

The traditional doctrine of thrift and enterprise looked to the supply of and demand for money to adjust interest rates and the adjusted rates to adjust the rate of saving to the requirements of the productive process.  But it can be argued that this view was not sufficiently nuanced in its estimate of the requirements of the productive process, that it missed the magnitude of the problem, and that it tended to lump together quite different requirements. … The requirements of an expanding productive process are that pure surplus income has to keep increasing in the surplus phase of an expansion, that it has to keep decreasing in the basic phase of the expansion, and that it vanishes when the cost of replacements and maintenance absorbs the whole of surplus. [CWL 15, 140, ftnt. 197]

the economic process can be wrecked by the stupidity of capital or by the stupidity of labor, by the demand of high profits or high wages out of due season. [CWL 21, 70]

The only sound solution to the problem of price spirals is the difficult solution.  When the price spread is contracting, entrepreneurs have to accept the fact that it is contracting; more generally, it has to be recognized that profits and the profit motive suffer from decreasing returns, as the normative proportion demonstrates; the attempt to pass on the effect of a decreasing price spread by lowering wages is futile, and with this futility known and accepted then the downward spiral is eliminated. … Similarly, when the price spread is expanding and consumer income is inflating, then the remedy is not an increase of wage rates.  The remedy lies in the hands of consumers themselves, for what causes the inflation of income is … that primary consumers are attempting to spend their more money for the same quantity of goods.  You say your income is inflating; but the cause of this is that you are spending on consumer goods too great a proportion of it; spend less and the inflation will stop; spend still less and the inflation will turn to deflation. … This is a harsh doctrine bidding producers to be content with decreasing profits and consumers to offset a rising market by curtailing consumption. But any other doctrine is illusory. [CWL 21, 80]

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]

Lonergan’s point is that there is no automatic mechanism creating monetary boundary conditions for a shift into this final distribution and price system.  Attempts to persist in accumulation (of capital) stage incomes would rather eventually be frustrated by the labour supply boundary condition…producers could only lay off workers to avoid a growing hoard of the new tool…Lonergan suggests we consider more cooperative solutions based on a collective understanding of his more sophisticated national income accounting which illustrates the full employment need to substitute for accumulation incomes which have lost their dynamic profit motivation. (i.e. they are sitting in the secondary markets doing nothing useful.) [Burley and Csapo, 1992-1, 139]

The idea of an expansion is not a future contraction. [CWL 21, 104]

General Macroeconomic Precepts:

The major adaptations by participants for the achievement of continuity, equilibrium, and realization of full potential, while avoiding the distortions of boom and slump are:

  • the crossovers exchanges between circuits must balance; i.e. be in concomitance
  • the serially conditioned flows within any circuit must keep pace; i.e. they must be in concomitance:
  • the levels of basic and surplus incomes must be equilibrated to purchase the flows of basic and surplus production, each of which income flows will change as percentages of total income in the different phases of the economic expansion.
  • understand the difference between real and relative vs. monetary and absolute changes in prices; and do not misinterpret the rising prices of a surplus expansion as a signal to overexpand, and then stimulate production into a boom to be followed by a slump; and do not misinterpret the falling prices of a basic expansion as a signal to contract production and lay off workers, and thus turn the basic expansion into a slump
  • understand the interest rate as an internal relation among functional flows rather than a magic lever controlled from without

Specific Macroeconomic Precepts

Surplus Expansion Phase

  1. Precept to Households: In a surplus expansion phase, save and invest. Do not demand with the increased income of this phase more consumer goods than the process is able to supply; that would be inflationary, it might menace the financial system, and cause the banking authorities to curtail the lending appropriate for a beneficial expansion.
  2. Precept to Firms: Do not misinterpret the rising prices of a surplus expansion as a signal to overexpand, and then stimulate production beyond the bounds of normative technical relations into a boom to be followed by the systematic correction called a slump
  3. Precept to Governments: In a surplus expansion phase, allow and support an increase in the income of those higher-income risk-takers who will save for investment.
  4. Precept to Central Banks: In a surplus expansion phase, infuse enough money into the system to enable an increased number and magnitude of transactions.
  5. Precept to the Entire Banking System: Lend enough to support the increasing need for credit in the early years of the surplus expansion. Do not grant loans for excess investment. You must police the credit-granting process. Don’t imagine that the economic process can expand beyond its natural constraints.

Basic Expansion Phase

  1. Precept to Firms: In the basic expansion phase, keep workers employed and increase compensation for purchase of the increasing bounty of consumer goods. From the start of the basic expansion through the beginning of the static phase, expansionary investment  and its correlate pure surplus income (“net aggregate savings” or “macroeconomic profits”) will systematically diminish.  Sustained employment and increasing compensation to lower-income workers will be required to effect adequate monetary basic demand.  Do not set as a cross-purpose goal the continuing increase in accounting profits in opposition to the system’s natural, systematically necessary decrease in pure surplus income to zero.
  2. Precept to Households: In the basic expansion phase when surplus expansion has been completed, spend all your increasing income not needed to be saved for retirement, no matter how large your income and no matter how high your standard of living, on the increasing supply of consumer goods and services; enjoy the higher standard of living which is being supplied.
  3. Precept to Governments:  In the basic expansion phase, allow and support an increase in the income of those in the lowest income strata who will spend all their income.
  4. Precept to Central Banks:  Infuse enough money into the process for working capital loans and installment loans to enable the increased production and sale of basic goods.  Do not attempt to manage the economic process by manipulating interest rates.
  5. Precept to Secondary Market Investors: Understand that this basic-expansion phase requires companies to keep workers employed and to increase the incomes of the lower-paid workers. Do not demand ever higher corporate accounting incomes when pure surplus income is systematically declining.  The layoffs associated will magnify a downward spiral of the economy into recession or depression.
  6. Precept to Successful Risk-Takers:  Be philanthropic in a way that keeps money in circulation so as to utilize capacity and avoid recession, and improve the culture and its institutions.

Static Phase

  1. Precept to Firms: In the theoretical static phase constituted by zero growth in “macroeconomic profits”, be content with stable cash flows and strive to retain employees.  The system is not generating the increasing accounting profits which the criterion of ever increasing profits calls for.  In this phase some units of enterprise can achieve gains only by other worthwhile entities suffering counterbalancing losses. Better for all entities supplying worthwhile products to be content with stable incomes until their and others’ invention and innovation make the next surplus expansion a possibility.
  2. Precept to Households:  In the theoretical static phase constituted by zero growth in “macroeconomic profits”, be content with flat incomes at the same contribution level and be thankful for employment.  In this phase your employer can achieve gains only by system-destroying layoffs and by causing you and competitor businesses to suffer equal and opposite compensating losses.
  3. Precept to Governments and Central Banks:  In the theoretical static phase, counsel the populace that the economy will be in a static phase until innovation creates new opportunities and that, presently, the types of growth that supply higher incomes do not exist.  And do not make loans for projects which ultimately will not generate the cash flow for repayment; i.e. do not diminish lending standards.
  4. Precept to the Entire Banking System: In the theoretical static phase, there is no need for an expansion of credit.Existing loans will be rolled over, but beyond that, the process has no need in the aggregate for your lending services.

[1]See Strang for the mathematics and technical meaning of divergence.

[2]See Strang for the mathematics and technical meaning of divergence.